DOES EUROPEAN UNEMPLOYMENT PROP UP AMERICAN WAGES?

Donald Davis

No 294370, Harvard Institute for International Development (HIID) Papers from Harvard University, Kennedy School of Government

Abstract: We consider trade between a flexible wage America and a rigid real wage Europe. In a benchmark case, a move from autarky to free trade doubles the European unemployment rate, while it raises the American unskilled wage to the high European level. Entry of the unskilled "South" to world markets raises =employment in Europe. But Europe's commitment to the high wage completely insulates America from the shock. Immigration to America raises American income, but lowers European income dollar-for-dollar, while European unemployment rises onefor- one. We consider a stylized game of the choice of factor market institutions. Mitterrand's Europe chooses a high minimum wage and Reagan's America chooses a flexible wage for the unskilled. Paradoxically, unskilled workers are worse off in Europe. Trade equalizes wages, but Europeans bear all of the unemployment required to sustain the high wage.

Keywords: International Development; International Relations/Trade; Labor and Human Capital (search for similar items in EconPapers)
Pages: 27
Date: 1996-09
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:hariid:294370

DOI: 10.22004/ag.econ.294370

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