Domestic Wages Research Articles

Vertical Product Differentiation and the Import Demand Function: Theory and Evidence

In this paper we use a model of vertical product differentiation to cast doubt on the general validity of the import demand function as specified in macroeconomic models. The empirical importance of our theoretical concerns is then examined with the aid of two hypotheses. According to the first hypothesis, an increase in domestic wages is expected to reduce the share in total imports for goods in which the domestic comparative advantage is in high quality varieties of these goods. The second hypothesis states that an increase in non-wage income will increase the share of a good?s imports if the country has comparative advantage in high quality varieties of this good. We find considerable empirical support for both hypotheses in the data for Germany, Japan and the United States.

TRADE POLICY VERSUS COMPETITION POLICY: SUBSTITUTES OR COMPLEMENTS?

This paper deals with the difference between trade policy and competition policy for domestic prices, wages, and employment when product and labour markets are imperfectly competitive. We show that in the presence of country-specific institutions like trade unions, trade policy and competition policy are no longer substitutes in disciplining product and labour market distortions. While both domestic entry and foreign imports affect domestic price-cost margins, they differ in their effectiveness and their impact on the domestic labour market. The results in this paper suggest that enforcement of competition policy without a sufficient degree of openness to imports is typically not a first-best outcome. While domestic entry increases union welfare, foreign imports reduce it. Competition policy in the presence of labour unions is insufficient to reduce labour market distortions, while international competition reduces both labour and product distortions.

Does foreign innovation affect domestic wage inequality?

We use an open-economy product-cycle model of domestic high-tech/low-tech wages to motivate an empirical specification and test key model-implied restrictions. With data for 11 countries from an internationally comparable data set from the OECD, we conduct panel cointegration analysis that supports the hypothesis that foreign and domestic innovation rates affect domestic wage inequality by equal and opposite magnitudes. The estimated elasticities imply that a 10% increase in the domestic (foreign) innovation rate leads to a 3% increase (decrease) in the high-tech wage rate, relative to the low-tech wage. An atheoretic empirical regression that includes several of the same variables, but not the same specification as the product-cycle model, fails to yield significant results, in contrast to the specification derived from the product-cycle model.

Product Cycles and Domestic Wage Inequality in Innovating Countries

High-technology industries comprise a significant and increasing share of manufactured output in industrialized countries. Increasing international competition in high-technology industries raises an important question: what is the effect of innovation in one country on the standard of living in another? Through the introduction of two types of workers, the effects of innovation and technology transfer on relative prices, wages, and income between workers both within and across innovating countries that transfer technology also can be examined. The results show that a change in the determinants of innovation and technology transfer in one country redistributes income in both countries.

Nominal Price and Wage Adjustment to Foreign Price Changes

The paper analyzes the interdependence between price and wage formation in an open economy with imperfectly competitive product and labor markets. The process by which changes in foreign prices measured in domestic currency are transmitted into domestic wages and prices is considered, and it is shown how informational problems may cause nominal rigidity in wages and prices. Although there is symmetric information in price and wage determination, the adjustment need not be symmetric, implying that changes in foreign prices may affect the terms of trade and real wages. Finally, it is shown how temporary nominal changes can have persistent real effects.

Some implications of external labour mobility for the development of micro‐states

Uses a one‐sector model to investigate how external labour mobility can affect the economic performance of micro‐states. In the absence of restrictions on labour market flows between a micro‐state and a larger economy, the micro‐state becomes virtually an extension of the large economy. It may expand or contract in total size relative to the larger economy, and gain or lose population accordingly; but the linkage of its level of real wages to the level of real wages in the larger economy constrains opportunities for independent growth in labour productivity and hence in output per capita. A labour‐exporting micro‐state will experience a more autonomous form of economic development when a binding quota on emigration detaches the domestic real wage from the foreign real wage. However, per capita growth is likely to be of a lower base than under conditions of unrestricted access.

THE SHORT‐RUN AND LONG‐RUN FACTOR‐MARKET CONSEQUENCES OF IMMIGRATION TO THE UNITED STATES*

ABSTRACT. This paper applies the production‐theory approach to assess the impact on domestic wages and employment of immigration to the United States. Inputs are disaggregated between recent immigrants, non‐recent immigrants, native workers, and capital. Census cross‐sectional data for 1980 and for 123 metropolitan areas are used. Empirical estimates are reported for alternative functional forms with special attention devoted to required curvature conditions which have frequently been violated in previous work. Elasticity estimates are reported for alternative settings, including for the short run where we view domestic factor prices as given and the long run where we treat them as flexible.

Formulating a Policy Response: Comment on Calvo, Leiderman, and Reinhart

FOLLOWING THEIR examination of the role of external factors in the revival of international capital inflows to Latin America, Calvo, Leiderman, and Reinhart (CLR) review the policy responses available to governments.' While acknowledging the contribution of improved economic performance, their focus on exogenous influences leads them to concentrate on the dangers of "excessive" influxes of short-term funds. With market failures quite able to generate the excess, the dangers of real exchange rate appreciation, poor intermediation of large-scale flows, and the threat of rapid reversal are clear. From this perspective, CLR examine different policy options for their effectiveness either in limiting the inflows or in neutralizing their effects. This note argues that the policies discussed are misleadingly treated as alternatives when, owing to substantial differences in principle, their appropriate application would be to very different policy objectives. It is suggested here that if recipient economies are to benefit from the inflows, while managing the risks that preoccupy CLR, a sequence or combination of policies may need to be applied. Beginning with the problem of "excessive" inflows induced by market failure, those failures associated with variable government credibility in the context of counterinflationary policy may be usefully singled out. Lack of confidence in the durability of contractionary monetary policies may prevent rapid downward adjustment in domestic wages and prices. The resulting high short-term interest rates, however, may attract speculative inflows based on the judgment that, at least temporarily, the exchange rate will be maintained. Whatever their detailed merits, two of the policies discussed by CLR would be relevant in helping to sustain

Labor emigration and the accumulation and transfer of human capital.

"This article examines the processes involved in the acquisition and transfer of human capital by Filipino overseas workers.... In the four major occupational groupings (seamen, production/construction workers, domestic helpers and entertainers), little homeward transmission of human capital has been identified.... Because of the high rate of unemployment in the economy, the outflow of workers has had no observable impact on domestic wage rates."

Industrial Restructuring and International Competition in Taiwan

In this paper trends and varying types of industrial restructuring in Taiwan are examined as the island continues to lose comparative advantage in international markets. Based on some official statistics, triggers of industrial restructuring are explored and the corporate strategies of industries are identified. There is evidence of specific triggers of industrial restructuring which include shortage of labor, rising domestic real wages, appreciation of currency value, increasing raw-material costs, and labor productivity changes. The author addresses corporate strategies both at home and abroad, with emphases upon the issues of hiring illegal foreign workers and the operating of outward investment. The government has played a major role in policy responses as reflected in efforts to expand domestic demand, diversify export markets, and revise mercantilist trade regulations. Additional national efforts include further liberalization of imports and foreign exchange controls and financial system reforms, as well as expansion of technology transfer.

Oil shocks: How can OECD countries manage them best?

As the 1990-91 Gulf crisis has emphasized, the risk of new oil shocks remains high in the medium to long run. Although energy intensity has decreased in the major countries since the first two oil shocks, the simulation performed with the MIMOSA world model, which is described in this paper, shows that a permanent rise in oil prices still induces direct strong negative consequences in the OECD: a temporary recession, a durable loss in production and employment and a lasting rise in inflation. Moreover, according to the model and due to national dissimilarities, an oil shock in Europe has some asymmetrical effects which are pointed out here. Further simulations test two different economic policy responses in the OECD: a ‘beggar-thy-neighbor’ policy in which each country tries to ‘export’ its unemployment by curbing domestic inflation and wage growth; and a co-ordinated policy supporting both supply and demand. The first leads to a general deflationist overshooting. The second ensures stabilization with a much lower cost in employment.

International labor migration and domestic labor supply.

"This paper constructs a dynamic, general equilibrium framework to study the relationship between international labor migration and domestic labor supply. The general equilibrium nature of the model enables us to endogenize the pattern of labor migration. The effect of labor migration on domestic wage rates and labor supply is shown to depend on the pattern of labor migration. If the substitution effect dominates the income effect in labor supply, the domestic supply of labor necessarily decreases in response to an inflow of migrants....Similarly, if the dominant effect is the income effect, the immigration of labor necessarily increases the domestic supply of labor."

Tariffs, Terms of Trade, Unemployment and the Real Exchange Rate

The less developed countries (LDCs) have been subjected to major exogenous shocks and drastic domestic policy changes in recent years. These shocks include changes in the terms of trade and/ or a policy shift away from the pervasive protectionism of the previous decades. The implementation of trade liberalization programs is likely to follow in many more developing countries. A large body of theoretical and empirical literature has developed which attempts to analyze the consequences of these changes, utilizing models which explicitly incorporate the main structural and institutional characteristics of the LDC economies.' The behavior of the real exchange rate, defined in various ways, but most commonly as the relative price of tradeables to non-tradeables, has been identified as being of central analytical and policy importance. While the literature on this subject recognizes the key link between the real exchange rate and domestic wages, the analytical models used generally suffer from serious limitations in terms of their characterization of the labor markets. The models used in the literature can be categorized into two groups: (a) flex-price models that give rise to full employment, and (b) models that assume full or partial wage rigidity thereby generating some form of unemployment. Conventional wisdom suggests that a rise in import tariffs or an improvement in the terms of trade would always lead to an appreciation of the real exchange rate. However, it is shown by Clague [3] and Edwards and van Wijnbergen [11] that the above result does not necessarily hold in more general models. However, these analyses were restricted to models with flexible wages. Wage rigidity is often ascribed to the existence of some form of wage indexation or other forms of government inter-

Imports and Domestic Wages: Is the Relationship Consistent with Expense Preference Behavior?

The relatively recent emergence of strong import competition has dramatically altered the employment relationship in a wide variety of industries. While previous analysis of imports has frequently been limited to effects on employment levels, it is inappropriate to presume that other job conditions remain unchanged. This study joins a growing number that examine the association between domestic wage levels and the degree of import penetration. As such, it can be considered part of a larger literature examining the influence of product-market structure on wages. Unfortunately, this literature is largely bereft of satisfactory theoretical underpinnings and has not convincingly explained why more monopolistic firms pay higher wages for otherwise equal workers. My agenda is threefold. First, I will present a theory for the association between market structure and wages that integrates two disparate literatures: expense preference behavior and notions of an efficiency wage. Second, I will demonstrate that import penetration (as one element of market structure) behaves roughly as predicted and in tandem with other elements of market structure. Third, I will suggest, and to the extent possible test, other rationales

Long-term impacts of import prices on domestic prices and wages

Anhand osterreichischer Quartalsdaten wurde untersucht, ob zwischen Preisen, Reallohnen, Importpreisen und anderen Variablen kointegrierende Beziehungen bestehen. Da fur die untersuchten Zeitreihen mehrere Kointegrationsvektoren gefunden wurden, ergab sich ein Interpretationsproblem. In dieser Arbeit wurde der Kointegrationsraum auf eine Weise transformiert, die es ermoglichte, die Kointegrationsvektoren als “Long-run”-Multiplikatoren zu interpretieren und daher die langfristigen Auswirkungen einer Importpreiserhohung auf das heimische Lohn- und Preisniveau zu untersuchen. (Der Anhang beschaftigt sich mit der Frage, unter welchen Voraussetzungen solch eine “kausale” Interpretation moglich ist.) Die geschatzten Effekte erwiesen sich als numerisch sehr bedeutend — sie liegen etwas hoher als in anderen vergleichbaren empirischen Studien — und gegenuber einer Anderung der Auswahl der Variablen als sehr robust.

Exchange rates, import costs, and domestic wage and price levels

Exchange rates, import costs, and domestic wage and price levels

A general equilibrium model of guest-worker migration: The source-country perspective

This paper examines the problem of guest-worker migration from an economy populated by identical, utility-maximizing individuals with finite working lives. The decision to migrate, the rate of saving while abroad, as well as the length of a migrant's stay in the foreign country, are all viewed as part of a solution to an intertemporal optimization problem. In addition to studying the microeconomic aspects of temporary migration, the paper analyses the determinants of the equilibrium flow of migrants, the corresponding domestic wage, and the level of welfare enjoyed by a typical worker. Effects of an emigration tax are also investigated.

Trade between Western Africa and the Atlantic World in the Pre-Colonial Era

IN 1728, PtRE LABAT, A FRENCH MISSIONARY and enthusiastic imperialist, advocated the introduction into Africa of a wide range of manufactured goods. Africans, he believed, would become hooked on French goods in the same manner as Europeans developed a dependency on tobacco. This dependency would induce them to offer all their labor, their trade and their industry.' Labat was neither the first nor the last European to articulate this view, although his religious credentials make him one of the more interesting advocates. The conviction that fostering wants among domestic wage earners would create both a marketoriented supply of labor and a demand for goods and services was widely held by contemporary observers of European industrialization. This same conviction, it has been argued, was a cornerstone of British policy toward Africa in the mid-nineteenth century.2 Most modern commentators accept the view that Europeans were at least partially successful in imposing this policy on Africa. If historians concede that Africa was thus pulled into the Atlantic economy, it is not such a large step to the view-also widely held-that Africa made indispensable contributions to the development of the pre-colonial, or pre-1870, international economy.3

Domestic dynamics and wage labour: A case study among urban residents in Qwaqwa

Domestic dynamics and wage labour: A case study among urban residents in Qwaqwa

MACROECONOMIC POLICY AND TRADE LIBERALIZATION: SOME GUIDELINES

Appropriate conduct of macroeconomic policy can play a crucial role in the success of trade liberalization. At a given nominal exchange rate, a trade liberalization that significantly reduces tariffs and quantitative restrictions on imports normally implies a reduction in the general level of domestic prices and wages, especially in the import competing sector. To diminish recessionary effects of domestic price and wage deflation, it is often appropriate to devaluate a country's currency in conjunction with a major trade liberalization. Monetary policy needs to be consistent with exchange rate policy, avoiding both restrictiveness that might induce recession and excessive ease that would fuel inflation and force future devaluations. Since trade liberalization can induce a short-run deterioration of the government's budget position, fiscal policy needs to remain restrained in order to limit the dangers posed by large government deficits. Wage policy should be directed toward facilitating adjustments in relative wage rates and credit policy should assume that adequate credit is available to finance expansion. Finally, government policy should avoid large balance of payments deficits.