Globalization of labor markets and macroeconomic equilibrium

It is shown that under all-round ‘atomistic’ behavior, international mobility of labor has a beneficial effect on national employment levels but an adverse effect on consumer-price-indices (CPIs) inflation rates. Accordingly, whether or not policymakers in individual countries will be prepared to welcome on macroeconomic grounds the increasing globalization of the labor markets will depend on how they evaluate lower unemployment relative to lower CPI inflation. On the other hand, mobility of labor has an overall positive effect on the wage-setters' position, implying that, contrary to the findings of much of the international-trade literature, an increasing globalization of labor markets would be welcome by unions. It is also shown that with globalization both of the labor markets and of the wage-setting processes, atomistic behavior by monetary policymakers may well lead to both high unemployment and high inflation. Indeed, we find that in such a situation, the best option for monetary policymakers is also to cooperate. Given the recent tendency for a greater globalization of the labor markets in the OECD both in terms of labor mobility and in the sphere of wage setting, this result provides support for more monetary co-operation among the industrialized countries. Finally, with international mobility of labor, inter-union co-operation coupled with inter-government co-operation may prove to be preferable even relative to all-round nonco-operative play.