Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/21398
Authors: 
Pflüger, Michael
Year of Publication: 
2003
Series/Report no.: 
IZA Discussion paper series 748
Abstract: 
This paper uses a two country trade and geography model of monopolistic competition to study the effects of wage policies and social policies on the location of industry. It is first shown that a union wage push in one of two otherwise identical countries induces a relocation of firms which increases with the level of economic integration as measured by trade costs. This 'traditional view' is then contrasted with a 'new economic geography view' in which one of the countries has historically emerged as the core. The agglomeration rent which accrues to the mobile factor gives unions and governments in the core scope to set higher wages and to choose more generous welfare policies than their counterparts in the periphery without having to encounter an exit of firms. The relationship between the maximum international union wage differential and the level of integration is shown to be bell-shaped.
Subjects: 
integration
wages
industry location
agglomeration
monopolistic competition
JEL: 
F21
R12
F16
F15
F22
F12
Document Type: 
Working Paper

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