Product Market Integration and Labour Markets: Aggregate Gains at the Cost of More Inequality?

34 Pages Posted: 23 Jan 2007

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: January 2007

Abstract

Important labour market consequences of globalization may arise via product market integration which affects the room for wage negotiations and generates job creation and destruction through structural changes. We find in a Ricardian trade model that aggregate increases in wages and employment may conceal important differences across sectors/groups driven by a different balance between "protection" and "specialization" rents. In particular, wage inequality tends to be U-shaped, at first decreasing and then increasing in the process of product market integration. Consequently, there are gains in both the efficiency and the equity dimension until the level of integration reaches a certain level at which a trade-off arises.

Keywords: trade frictions, relative productivity, rent sharing, job turnover, inequality

JEL Classification: F15, F16, J39, J50, J63

Suggested Citation

Andersen, Torben M. and Sorensen, Allan, Product Market Integration and Labour Markets: Aggregate Gains at the Cost of More Inequality? (January 2007). IZA Discussion Paper No. 2556, Available at SSRN: https://ssrn.com/abstract=958722

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Bonn, D-53072
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Allan Sorensen

Aarhus University, Economics and Business ( email )

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Aarhus V, 8210
Denmark

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