Globalization, Labor Market Rigidities and Multiple Equilibria

Abstract

This paper analyses the effects of globalization, stricter intellectual property rights protection and different labor market policies in a dynamic North-South general equilibrium model with non-scale growth. To this aim, we generalize the Schumpeterian product-lifecycle model of Dinopoulos and Segerstrtom (2003) by adding frictional unemployment and firing costs to their framework. We find that the effects on North-South wage inequality, employment and growth depend qualitatively on the level of Northern firing costs. Contrary to the special case of perfect labor market flexibility studied by Dinopoulos and Segerstrom, globalization may not benefit anymore both the South in terms of a relative-wage catch up and the North in terms of a temporary innovation and growth push.Economic Growth, North-South Trade, Globalization, Frictional Unemployment, Firing Costs