DP3995 | International Product Market Integration, Rents and Wage Formation

Publication Date

23/07/2003

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Abstract

International product market integration enhances both export possibilities through easier access to foreign markets, but also the import threat arising from foreign firms penetrating into the domestic market. These mechanisms affect wage formation and employment creation through many channels including product market rents and the possibility that jobs may be relocated across national labour markets. Possibilities and threats, however, will not in general be uniformly distributed across firms and therefore groups in the labour market. These issues are explored in a Ricardian trade model with imperfect competition, heterogeneity in the labour market, and decentralized wage-bargaining. The Paper analyses how product market integration affects wage formation, and identifies characteristics of winners and losers in the integration process.