Does self-employment reduce unemployment?

This paper investigates the dynamic relationship between self-employment and unemployment rates. On the one hand, high unemployment rates may lead to start-up activity of self-employed individuals (the “refugee” effect). On the other hand, higher rates of self-employment may indicate increased entrepreneurial activity reducing unemployment in subsequent periods (the “entrepreneurial” effect). This paper introduces a new two-equation vector autoregression model capable of reconciling these ambiguities and estimates it for data from 23 OECD countries between 1974 and 2002. The empirical results confirm the existence of two distinct relationships between unemployment and self-employment: the “refugee” and “entrepreneurial” effects. We also find that the “entrepreneurial” effects are considerably stronger than the “refugee” effects.     

The declining costs of international trade and unemployment

A two-country, two-sector new geography model where workers are imperfectly monitored is used to examine the relationship between falling trade costs and unemployment. It is shown that as trade costs fall over time the world naturally falls into an industrialized core and an agricultural periphery. Globalization has a positive effect on employment in the core in both the short and long term. The periphery suffers employment losses in the short term but can gain in the long term.     

Fair,Efficient and Envy-Free Bargaining: An Experimental Test of the Brams-Taylor Adjusted Winner Mechanism

The Adjusted Winner mechanism for two-player bargaining has been theoretically shown to produce “fair” (efficient and envy-free) outcomes (Brams and Taylor 1996). We study this claim experimentally in a bilateral bargaining game of incomplete information for two divisible goods using three information conditions. Results indicate that the Adjusted Winner mechanism can be quite effective in achieving both efficient, equitable and envy-free outcomes in an experimental setting but results vary greatly depending on the knowledge that each party has of the preferences of their bargaining partner. Under conditions of common knowledge, when players have competing preferences, their bilateral decisions converge toward efficient outcomes, yet only one-third can be classified as “envy-free.” In an environment where there is more uncertainty about preferences, pronounced strategic bidding emerges yet the result is twice as many envy-fee outcomes with increased levels of efficiency. Despite the fact that players dramatically misrepresent their true valuation for objects when ordinal preferences are commonly known to be complementary, both efficiency and envy-freeness approach maximum levels.     

Preference heterogeneity, wage inequality, and trade

We consider individuals who value product variety, and who can be skilled or unskilled as workers. Skilled people prefer to consume skill-intensive goods. We show that under plausible conditions an increase in the relative size of the skilled population increases the relative wage of skilled workers, thereby increasing wage inequality. In our two-country model of trade, an increase in the relative supply of skilled labor in either country increases the relative wage of skilled workers, and hence increases inequality in both countries.     

Globalization and the ‘confidence game’

We show that governments in developing countries have an incentive to play the “confidence game” — wherein the need to win the confidence of the international capital market ‘can actually prevent a country from following otherwise sensible policies and force it to follow policies that it would normally consider perverse’. This incentive arises because of a combination of a ‘conformity bias’ and ‘good news bias’ in governmental decision making in an open economy, which results in inefficient outcomes which increases rather than decreases the threat of devaluation. While institutions that encourage greater transparency and the public revelation of information, may often mitigate this inefficiency, on some occasions increased transparency may even exacerbate the inefficiency.     

Fairness,trade, and inequality

We develop a model of international trade between two symmetric countries that features inter-group inequality between managers and workers, and also intra-group inequality within each of those two groups. Individuals are heterogeneous with respect to their managerial ability, and firms run by more able managers have a higher productivity level and make higher profits. There is rent sharing at the firm level due to fair wage preferences of workers, and hence firms with higher profits pay higher wages in equilibrium in order to elicit their workers' full effort. We show that in this framework international trade leads to a self-selection of the best firms into export status, with exporting firms having to pay a wage premium. Aggregate welfare increases, but there is also larger inequality along multiple dimensions: Involuntary unemployment and income inequality between managers and workers increase, and so does inequality within these two subgroups of individuals, as measured by the respective Gini coefficients.     

Impact of international trade on unemployment under oligopoly

By studying a two-sector general equilibrium model in which firms engage in oligopolistic competition and unemployment is a result of the existence of efficiency wages, we derive the following results analytically. A country's comparative advantage in producing manufactured goods increases with the level of efficiencies in the labor market. The opening of international trade leads to the equalization of wage rates even though countries differ in their factor endowments and labor market efficiencies. If countries have the same level of labor market efficiencies but differ in their endowments of labor and land, the opening to international trade leads to an increase in the wage rate in both countries.     

Minimum wage regulation and economic growth

This paper investigates the long-run growth implications of minimum wage regulation (MWR) enforced nationally using a familiar aggregate growth model. The paper shows that MWR, if it is effective, always lowers the rate of growth, and that the minimum wage floor, if it is sufficiently high, causes the economy to decay all the way toward the origin. The effects of a “wage-mark-up” policy, a variation of MWR, are also examined.     

Product specialization in international trade: A further investigation

In an influential paper, Schott [Schott. Peter K. (2004). “Across-product versus within-product specialization in international trade.” Quarterly Journal of Economics, 119 (2): 647–678] makes two empirical observations about U.S. imports. (1) The United States is increasingly sourcing the same product (however narrowly defined) from both developed and developing countries. That is, ‘across-product specialization’ has been decreasing. (2) The unit values of these multiple-sourced products are positively and significantly correlated with the capital and skill abundance of exporters and with the capital–labor ratios used by exporters. That is, endowments-driven ‘within-product specialization’ has been increasing. We show that both these observations extend to the imports of Brazil, India and Japan. However, our main finding is that observation (1) is largely driven by two factors. First, China is the dominant low-wage exporter of multiple-sourced products. Second, the most developed countries remain the primary exporters of multiple-sourced products. The U.S. case is the most extreme of our four importers: When China is deleted from the U.S. import data there is no trend in across-product specialization and rich exporters are increasing their trade share of multiple-sourced products. Since deleting China has no theoretical justification, these results must be viewed not as a contradiction of Schott's work but as a way of deepening our understanding of his empirical results.     

Trade patterns,unemployment and growth

This paper analyses the implications of a minimum wage in an open economy two-sector model where the effect of growth on trade and unemployment is explicitly determined. The first-best policy is a wage subsidy to all employment while the second-best policy is a production tax cum subsidy. In the absence of policy intervention it is shown that growth in the short run results in decreasing unemployment for the home country if it is specialized in consumption goods or incompletely specialized provided that the minimum wage is binding. If the economy is specialized in investment goods, then unemployment may increase initially but as growth continues the minimum wage no longer remains binding and full employment is restored. In the long run by examining the dynamic interaction between trade and growth it is possible for the economy to be incompletely specialized with unemployment. If the economy specializes in consumption goods, it is possible for the economy to attain full employment.     

Trade and the location of industries: Some new results

We study a two-country two-sector model with free entry and monopolistic competition where both industries use labour to produce differentiated goods. The two countries are identical except for size. Labour is freely mobile across industries but it cannot move internationally. Transport costs affect both industries. The location of industries and the pattern of trade are the results of the interaction of two effects: the home market effect and the wage differential effect. The main results are: (i) if the two countries are sufficiently close in size and demand elasticities differ across industries (transport costs being equal), a continuous fall in transport costs from a prohibitive level to zero is associated with a reversal in the pattern of trade at some intermediate level. For large transport costs, the large country is a net exporter of the more differentiated good. For lower transport costs, the large country becomes a net exporter of the less differentiated good; (ii) if the two countries are very different in size and demand elasticities differ across industries (transport costs being equal), the larger country is always a net exporter of the less differentiated good.     

Trade liberalization, wage inequality, and endogenously determined nontraded goods

We examine the boundary between traded and nontraded goods as a channel for trade to impact factor prices. In a two-country, two-factor, continuum-good model, tariffs generate a range of nontraded goods. A tariff reduction has a direct effect to expand a country’s import set and an indirect effect through terms of trade to expand its export set. We show that the export expansion can dominate the import expansion, raising the relative demand for the factor intensively used in production. The result is useful in explaining observed rising wage inequality in developing countries following trade liberalization.     

A comparative institutional analysis of agreements on product standards

The WTO and the EU have chosen two different agreements on product standards. While the WTO's approach is primarily based on a “National Treatment” (NT) principle, the EU's approach crucially relies on a principle of “Mutual Recognition” (MR). This paper offers a first look at the comparative performance of these two principles. We show that standards are imposed for levels of externalities that are too low under NT and too high under MR. This suggests that NT should be preferred to MR when the amount of trade in goods characterized by high levels of externalities is large.     

Reducing working hours in the context of growing real capital mobility

Can the reduction of working hours be a suitable policy instrument to reduce unemployment? The following article presents a model of the effects of such a reduction—without offsetting adjustments to wage rates—on unemployment in the context of growing real capital mobility between countries and discusses the consequences for economic policy.     

Market integration and strike activity

We consider a two-country model of wage determination with private information in unionized, imperfectly competitive, industries. We investigate the effects of opening up markets to trade as well as of further market integration on the negotiated wage and the maximum delay in reaching an agreement. From an initial situation of two-way intra-industry trade, an increase in product market integration decreases the maximum delay in reaching an agreement. However, opening up markets to trade has an ambiguous effect on both the wage outcome and the maximum real delay time.     

Wages and foreign ownership A comparative study of Mexico, Venezuela, and the United States

This paper explores the relationship between wages and foreign investment in Mexico, Venezuela, and the United States. Despite very different economic conditions and levels of development, we find one fact that is robust across all three countries: higher levels of foreign investment are associated with higher wages. However, in Mexico and Venezuela, foreign investment is associated with higher wages only for foreign-owned firms — there is no evidence of wage spillovers leading to higher wages for domestic firms. The lack of spillovers in Mexico and Venezuela is consistent with significant wage differentials between foreign and domestic enterprises. In the United States, where the evidence suggests some wage spillovers from foreign to domestic enterprises, wage differentials are smaller.     

Intraindustry trade and the skill premium: Theory and evidence

We explore theoretically and empirically the relationship between intraindustry trade and the skill premium. Our model features a Chamberlinian-type mechanism of income distribution based on quasi-homothetic consumer preferences, non-homothetic production, and factor-biased scale economies at the firm level. The analysis focuses on a two-country, one-sector model of intraindustry trade with two factor inputs consisting of high-skilled and low-skilled labor. We find that a move from autarky to free trade (a) raises the output of the representative firm and its level of total factor productivity, and (b) reduces (raises) the relative wage of high-skilled workers under the hypothesis of output-skill substitutability (output-skill complementarity). Plant-level evidence from Mexico supports the empirical relevance of the proposed income-distribution mechanism.     

The Domestic Sources of Multilateral Trade Negotiations: Explaining Brazil's Negotiating Position in the Doha Round

This article investigates the effects of a transfer between two countries participating in a customs union. This analysis yields very paradoxical results which differ from the conclusions obtained by the traditional literature which has been developed in a two-country framework or in a multilateral world but with universal free trade. The compensation scheme adopted by the authorities of the customs union may create an overall terms of trade deterioration and induce an impoverishment for both member countries. Thus, transfers may not be an adequate instrument to redistribute the gains of economic integration between the members of a free trade association.     

North-South trade and directed technical change

In a world where poor countries provide weak protection for intellectual property rights (IPRs), market integration shifts technical change in favor of rich nations. Through this channel, free-trade may amplify international wage differences. At the same time, integration with countries where IPRs are weakly protected can slow down the world growth rate. An important implication of these results is that protection of intellectual property is most beneficial in open countries. This prediction, which is novel in the literature, is consistent with evidence from a panel of 53 countries observed in the years 1965-1990. The paper also provides empirical support for the mechanism linking North-South trade to the direction of technical change: an increase in import penetration from low-wage, low-IPRs countries is followed by a sharp fall in R&D investment in a panel of US manufacturing sectors.     

Ökonomische Wurzeln des Populismus

Increasing populism in developed Western countries such as Germany can be traced to various causes, including economic ones. In these countries, advancing globalisation and technological progress lead to labour market and income effects that have had a negative impact on certain groups of people (wage reduction, increase in the risk of unemployment). The fear of such developments — whether justified or unfounded — results in the desire for political decisions that push back the catalysts of these economic developments. Therefore, international trade with low-wage countries and labour saving technological progress in particular often breed populist parties.