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Trade and the (dis)incentive to reform labor markets: the case of reform in the European Union

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  • George Alessandria
  • Alain Delacroix

Abstract

In a closed economy general equilibrium model, Hopenhayn and Rogerson (1993) find large welfare gains to removing firing restrictions. We explore the extent to which international trade alters this result. When economies trade, labor market policies in one country spill over to other countries through a change in the terms of trade. This reduces the incentive to reform labor markets. In a policy game over firing taxes between countries, we find that countries optimally choose positive levels of firing taxes. A coordinated elimination of firing taxes yields considerable benefits. This insight provides some explanation for recent efforts toward labor market reform in the European Union

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  • George Alessandria & Alain Delacroix, 2004. "Trade and the (dis)incentive to reform labor markets: the case of reform in the European Union," Working Papers 04-18, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:04-18
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    More about this item

    Keywords

    Labor market; Trade; European Union;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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