Product Market Integration, Wages and Inequality

36 Pages Posted: 27 Jul 2005

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Allan Sorensen

Aarhus University, Economics and Business

Date Written: March 2005

Abstract

International integration strengthening intra-industrial trade may have important implications for employment, wages and inequality. The reason is that product market integration enhances export possibilities through easier access to foreign markets, but also import threats arising from foreign firms entering the domestic market. We explore the implications of these mechanisms in a general equilibrium version of a Ricardian trade model allowing for heterogeneity and imperfect competition in both product and labor markets. International integration is interpreted as a reduction in trade frictions. We find that wage dispersion in general tend to be U-shaped, at first falling and then increasing in product market integration. This finding has important implications not only for the 'globalization' debate, but also for empirical analysis.

Keywords: Trade frictions, comparative advantages, rent sharing, inequality

JEL Classification: F15, F16, J39, J50

Suggested Citation

Andersen, Torben M. and Sorensen, Allan, Product Market Integration, Wages and Inequality (March 2005). CEPR Discussion Paper No. 4963, Available at SSRN: https://ssrn.com/abstract=771469

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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Building 322
DK-8000 Aarhus C
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+45 8 942 1609 (Phone)
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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Allan Sorensen

Aarhus University, Economics and Business ( email )

Fuglesangsalle 4
Aarhus V, 8210
Denmark

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