Making Sense of Bolkestein-Bashing: Trade Liberalization Under Segmented Labor Markets

33 Pages Posted: 3 Jun 2005

See all articles by Gilles Saint-Paul

Gilles Saint-Paul

University of Toulouse I - GREMAQ-IDEI; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

Trade liberalization is often met with sharp opposition. Recent examples include the so-called Bolkestein directive, which allows service providers from a given EU member to temporarily work in another member country. One way to view such a reform is that it simply widens the range of goods that are tradeable. This kind of reform is analyzed in a two-country Dornbusch-Fischer-Samuelson style model, where labor cannot relocate to another sector upon a non expected increase in the range of goods that can be traded. The effect of liberalization on the terms of trade tends to favor the poorer country (the East), if (as assumed) the most sophisticated goods are tradeable before reform. Second, under ex-post liberalization, there exists a class of workers in the West who are harmed because they face competition from Eastern workers and cannot relocate to other activities. But if the East's economy is relatively small, their wage losses are not very large. Things are different, however, if there exist asymmetries in labor market institutions, such that upon reform, labor can relocate in the East but not in the West. Some workers in the West can then experience very large wage losses. Thus, rigid labor markets in the West magnify opposition to reform there.

Keywords: trade liberalization, European integration, Bolkestein directive, labor mobility, labor market institutions, comparative advantage, terms of trade

JEL Classification: F16, F11, F13

Suggested Citation

Saint-Paul, Gilles, Making Sense of Bolkestein-Bashing: Trade Liberalization Under Segmented Labor Markets (June 2005). IZA Discussion Paper No. 1618. Available at SSRN: https://ssrn.com/abstract=735203

Gilles Saint-Paul (Contact Author)

University of Toulouse I - GREMAQ-IDEI ( email )

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