Economic integration, wage policies, and social policies

This paper sets up a two country monopolistic competition modelwith intra-industry trade to study the effects of an exogenousdifferential in wage and social policies on the location ofindustry. Two model scenarios are considered. In the traditionalone with physical capital, such a differential induces a relocationeffect which increases with the level of trade integration.The ‘new economic geography’ world assumes mobileentrepreneurs which can relocate thus bringing agglomerationforces into play. The most significant difference between thisworld and the traditional one is that, at high levels of tradeintegration, where one country has emerged as the core and theother as the periphery, the core may have more generous socialpolicies and higher wages than the periphery without inducinga relocation of firms. The scope to have higher wage is constrained,however, and related to the level of trade integration in abell-shaped way.