Labor Market Regulation, International Trade and Footloose Capital

Tapio Palokangas

No 10468, IZA Discussion Papers from IZA Network @ LISER

Abstract: I examine the effects of globalization in countries where the employed workers support the unemployed and the governments control wages by regulating the workers' relative bargaining power. I use a general oligopolistic equilibrium model of two integrated countries with two inputs: labor and potentially footloose capital. National competition for jobs by labor market deregulation creates a distortion with suboptimal wages. The mobility of capital aggravates that distortion by increasing the wage elasticity of labor demand, which decreases wages and welfare even further. The delegation of labor market regulation to an international agent eliminates that distortion, increasing wages and aggregate welfare.

Keywords: international trade; footloose capital; labor market regulation; capital market liberalization (search for similar items in EconPapers)
JEL-codes: C78 F16 F68 J52 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2017-01
New Economics Papers: this item is included in nep-int and nep-lab
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Published - revised version "Public Policy, Footloose Capital, and Union Influence" published in: Review of International Economics, 2020, 28 (4), 976-991.

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