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INTERNATIONAL WELFARE AND EMPLOYMENT LINKAGES ARISING FROM MINIMUM WAGES

Authors

  • Hartmut Egger,

    1. University of Bayreuth, Germany; ETH Zurich, Switzerland; University of Colorado, U.S.A.
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  • Peter Egger,

    1. University of Bayreuth, Germany; ETH Zurich, Switzerland; University of Colorado, U.S.A.
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  • James R. Markusen

    1. University of Bayreuth, Germany; ETH Zurich, Switzerland; University of Colorado, U.S.A.
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    • We would like to thank the editor Kenneth I. Wolpin, three anonymous referees, Herbert Walther, Udo Kreickemeier, and participants at the annual CESifo Global Economy conference 2010 as well as seminar participants at the Vienna University of Economics and Business and the Institute for Employment Research for helpful comments and suggestions. Please address correspondence to: James R. Markussen, Department of Economics, University of Colorado Boulder, Economics Building Room 210, Boulder, CO 80309-0256. Phone: 1 303 492 0748; Fax: 1 303 492 8960. E-mail: james.markusen@colorado.edu


  • Manuscript received March 2010; revised March 2011.

Abstract

We formulate a two-country model with monopolistic competition and heterogeneous firms to reconsider labor market linkages in open economies. Labor market imperfections arise by virtue of country-specific real minimum wages. Abstracting from selection of just the best firms into export status, standard effects on marginal and average firm productivity are reversed in our model, yet there are significant gains from trade arising from employment expansion. In addition, we show that with firm heterogeneity an increase in one country’s minimum wage triggers firm exit in both countries and thus harms workers at home and abroad.

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