Does globalization lead to a rat race of national labor-market institutions?

Peter Stauvermann

doi:10.2298/pan1301073s

Abstract

Since just around 30 years we observe that the labor?s share of the national income decreases in most countries. In this paper, we introduce an endogenous overlapping generation growth model with an institutional setting of the labor market to show that the changes of the labor-market institutions are one main reason for the decrease of the labor?s share. These changes are mainly caused by the increasing globalization resulting in open capital markets and as a consequence in a competition between countries with respect to the labor-market institutions. In the long run, all will suffer. The only ways to stop this rat race are capital controls or international agreements on the labormarket institutions.

Highlights

We show that international competition and open capital markets lead to a rat race to attract capital from abroad, as long as international cooperation does not take place
We introduce an overlapping generations (OLG)-model with a Leontief production function in a closed economy
We introduced an endogenous growth model which is based on a Leontief production function, and it has the features as the AK-Model introduced by Sergio Rebelo (1991), but with a microeconomic foundation, where we used the framework of an OLG-model

Summary

The Model

We use an OLG approach introduced by Paul A. The optimal time allocation is independent of the period, the wage rate per effective labor unit, and the capital stock It only depends on the learning parameter .The second step of the individual is to determine the optimal intertemporal allocation of her wage income between current consumption and future consumption. This problem can be solved by a Lagrangian approach, taking (1) and (2) into account: max , , L , , =. If workers and capital owners maximize their incomes with respect to their efforts and we get the following best response functions: Solving this system, we get the Cournot-Nash equilibrium of the labor dispute:. We allow the international mobility of capital

A Small Open Economy

The Two Country Case

Conclusions