Jens Südekum

TRADE, WAGES, AND PRODUCTIVITY: TRADE, WAGES, AND PRODUCTIVITY

We develop a general equilibrium monopolistic competition model in which wages, productivity, consumption diversity, and markups respond to trade integration. We structurally estimate the model and simulate the impacts of removing all trade barriers generated by the Canada–U.S. border. Firm selection gets tougher by 8.09% in Canada and by 0.80% in the United States. Markups that consumers face, which are central to welfare, fall by up to 12.11% in Canadian provinces and by up to 2.82% in U.S. states. However, changes in markups measured at the firm level are ambiguous, thus providing a different piece of information.

The Wage Curve and Agglomeration

New Economic Geography models usually abstract from unemployment. By contrast, wage curve models (Blanchflower and Oswald, 1994) imply a negative correlation between regional unemployment and wages, but fail to account for agglomeration effects. Relying upon some stylised facts concerning the EU-15 regions a theoretical model is built combining a wage curve with an increasing returns technology. Large ‘core’ regions turn out having both higher equilibrium wages and lower unemployment rates than peripheral regions. Regional disparities can develop endogenously and labour mobility does not negate the wage curve mechanism, but rather strengthens it.