Fair Wages and Human Capital Accumulation in a Global Economy

This paper analyzes trade in an asymmetric 2×2×2 world, where the two countries, labelled America and Europe, differ in their attitudes towards wage inequality. In both America and Europe, fair wage considerations compress differentials between the wages for skilled and unskilled workers, leading to involuntary unemployment of unskilled workers in equilibrium. European workers are more averse to wage inequality than American workers though, and as a consequence Europe is characterised by lower wage differentials as well as higher unemployment. Allowing for endogenous skill formation in both countries, the effects of a globalization shock – modelled as the entry of newly industrializing countries into the trading world – on prices and employment levels are derived.globalization, globalisation, unemployment, fair wages, skill upgrading

Tariff Reforms with Rigid Wages

This paper analyses the effects of tariff reforms on welfare and market access in a competitive small open economy that is characterised by involuntary unemployment due to non-market clearing wages that are fixed either in terms of the numeraire or in real terms. We show that recent tariff-reform results can be extended to integrated reforms of tariffs and the wage rate, and that the inherent tension between reforms that increase welfare and market access carry over. We also derive welfare increasing tariff-reform strategies that keep the wage rate constant, and show that this tension may be attenuated.Tariff Reform, Unemployment, Small Open Economy

Redistribution in the Open Economy: A Political Economy Approach

This paper develops a two-country model of international trade in which citizens who are heterogeneous with respect to their factor endowments vote over tariffs and income tax rates. In the politico-economic equilibrium, each country chooses its national policies by majority voting, taking the policy choice of the other country as given. By incorporating both income and trade taxes in a unified international-trade framework, we uncover the interplay between majority voting over these two instruments at the domestic level and strategic interdependencies between countries’ trade policies. Our main result is that greater inequality can be conducive to more redistribution via income taxation, more protectionist policies in capital-abundant countries, and less protectionist policies in labour-abundant countries. The model can accommodate the predictions of recent empirical studies on the relationship between inequality, protectionism, and redistribution.International trade, majority voting, inequality, income taxation, tariffs.

Worker-Specific Effects of Globalisation

This paper sets up a general equilibrium model in which firms differ in their productivity, and workers have fairness preferences and hence provide full effort only if their wage is sufficiently high. With the wage considered fair by workers depending on the operating profits of the firm in which they are employed, more productive firms pay higher wages. We study trade between two symmetric countries. Exporters have higher operating profits, leading to an exporter wage premium. There are worker-specific effects of trade due to both the exporter wage premium and a reallocation of workers between firms.Heterogeneous firms, Wage inequality, Fair wages, Involuntary unemployment

Why foreign ownership may be good for you

We develop a general equilibrium two-country model with heterogeneous producers and rent sharing at the firm level due to fairness preferences of workers. We identify two sources of a multinational wage premium. On the one hand, there is a pure composition effect because multinational firms are more productive, make higher profits, and therefore pay higher wages. On the other hand, there is a firm-level wage effect: A multinational firm pays higher wages in its home market than an otherwise identical national firm since it has higher global profits. We analyse how these two sources interact in determining the multinational wage premium in a setting with two identical countries, and show that in this case the wage premium is fully explained by firm characteristics. We then allow for technology differences between countries and find that a residual wage premium exists in the technologically backward country, but not in the advanced country. --multinational firms,wage premium,heterogeneous firms

International Trade, Union Wage Premia,and Welfare in General Equilibrium

We study how two distinct forms of globalisation, trade cost reductions and opening up of trade in previously shielded sectors, affect sector-specific wages, employment levels and aggregate welfare in a two-country model of general oligopolistic equilibrium (GOLE) with partly unionised labour markets. We find that both forms of globalisation increase union coverage, and they also lead to a lower union wage premium in shielded sectors. In contrast, wage premium in open sectors and aggregate welfare are affected differently by the two types of globalisation. Trade cost reductions in open sectors always lead to higher union wage premia and to lower aggregate welfare, while an increased number of open sectors lowers the union wage premium, and it may also increase welfare.Globalisation; Unions; Non-traded Goods; General Oligopolistic Equilibrium

Firm Heterogeneity and the Labour Market Effects of Trade Liberalisation

This paper develops a model that incorporates workers’ fair wage preferences into a general equilibrium framework with monopolistic competition between heterogeneous firms à la Melitz (2003). By assuming that the wage considered to be fair by workers depends on the productivity and thus the economic success of the firm they are working in, we can study the determinants of profits, involuntary unemployment and within-group wage inequality in a unified framework. We use this model to investigate the effects of globalisation. In a benchmark case with identical costs of entering domestic and foreign markets, there are gains from trade accompanied by distributional conflicts, which have so far not been accounted for in the literature: a simultaneous increase of average profits and involuntary unemployment as well as a surge in within-group wage inequality.heterogeneous firms, fair wages, unemployment, wage inequality, trade liberalisation

International trade, union wage premia, and welfare in general equilibrium

We study how two distinct forms of globalisation, trade cost reductions and opening up of trade in previously shielded sectors, affect sector-specific wages, employment levels and aggregate welfare in a two-country model of general oligopolistic equilibrium (GOLE) with partly unionised labour markets. We find that both forms of globalisation increase union coverage, and they also lead to a lower union wage premium in shielded sectors. In contrast, the union wage premium in open sectors and aggregate welfare are affected differently by the two types of globalisation. Trade cost reductions in open sectors always lead to higher union wage premia and to lower aggregate welfare, while an increased number of open sectors lowers the union wage premium, and it may also increase welfare. --Globalisation,Unions,Non-traded Goods,General Oligopolistic Equilibrium

Unions, Competition and International Trade in General Equilibrium

We develop a two-country, multi-sector model of oligopoly in which unionised and non-unionised sectors interact in general equilibrium. The model is used to study the impact of trade liberalisation, deunionisation and firm entry on wages in unionised and non-unionised sectors, and on welfare. We find that a shift from autarky to free trade increases non-union wages and welfare, whereas the effect on union wages is ambiguous. We also show that partial deunionisation leads to higher wages in both unionised and non-unionised sectors, but only increases welfare when the proportion of unionised sectors is sufficiently low. Finally, wages in non-unionised sectors necessarily increase with firm entry, while the response of union wages and welfare depends on the trade regime.Trade Unions, Product Market Competition, General Oligopolistic Equilibrium, Trade Liberalisation

Why Foreign Ownership May be Good for You

We develop a general equilibrium two-country model with heterogeneous producers and rent sharing at the firm level due to fairness preferences of workers. We identify two sources of a multinational wage premium. On the one hand, there is a pure composition effect because multinational firms are more productive, make higher profits, and therefore pay higher wages. On the other hand, there is a firm-level wage effect: A multinational firm pays higher wages in its home market than an otherwise identical national firm since it has higher global profits. We analyse how these two sources interact in determining the multinational wage premium in a setting with two identical countries, and show that in this case the wage premium is fully explained by firm characteristics. We then allow for technology differences between countries and find that a residual wage premium exists in the technologically backward country, but not in the advanced country.multinational firms, wage premium, heterogeneous firms