Product Market Integration, Wage Dispersion and Unemployment

Abstract

Even when international product market integration is taking place between fairly similar countries with low labor mobility, it may have important effects for labor markets by increasing the mobility of jobs. This creates both opportunities through exports and threats from imports. Is there any reason why the benefits and costs of product market integration should be unequally distributed across different groups in the labor market? Considering integration as a gradual process lowering trade frictions it is found that there is such a bias in the sense that the gains tend to accrue to the high paid and the loses to the low paid. Product market integration may thus lead to a more unequal distribution of wages and employment, even though there are aggregate gains in terms of higher real incomes and employment.

Keywords: Trade Frictions, Wage Formation, Inequality, Unemployment

JEL Classification: F15, J30, J50