Does European Unemployment Prop Up American Wages? National Labor Markets and Global Trade

Abstract

The author considers trade between a flexible-wage America and a rigid-wage Europe. In a benchmark case, a move from autarky to free trade doubles European unemployment. American wages rise to the European level. Entry of the unskilled 'South' to world markets raises European unemployment. Europe's commitment to the high wage wholly insulates America from the shock. Immigration to America raises American income, but lowers European income dollar for dollar, while European unemployment rises. Absent South-North migration of the unskilled from 1970-90, Europe could have maintained the same wage with from one-eighth to one-fourth less unemployment. Copyright 1998 by American Economic Association.

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