Product Market Integration and Wage Formation

Abstract

This paper analyses the basic labour market inter-dependencies among coun tries with intra-industrial trade and imperfectly competitive product and labour markets. The paper stresses two major channels through which increased integration may affect product markets and therefore in turn labour markets. First, market entry becomes easier and/or less costly implying that more goods become traded goods. Second, market integration among economies already open to trade may reduce the explicit or implicit trade costs of selling in foreign markets. It is found that the two channels have different implications for wage formation.