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The impact of globalisation with rigid labour markets [Elektronische Ressource] / vorgelegt von Tobias Seidel

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The Impact of Globalisationwith Rigid Labour MarketsInauguraldissertationzur Erlangung des GradesDoctor oeconomiae publicae (Dr. oec. publ.)an der Ludwig-Maximilians-Universität München2006vorgelegt vonTobias SeidelReferent: Prof. Dr. Dr. h.c. Hans-Werner SinnKorreferent: Prof. Dr. Peter EggerPromotions-abschlussberatung: 07. Februar 2007AcknowledgementsFirstandforemost,IwouldliketothankmysupervisorHans-WernerSinnforhisadviceand encouragement during my Ph.D. studies. He provided me with the opportunity towork in a very inspiring environment. I am also very much indebted to Peter Egger foruncountable fruitful discussions and comments on all parts of this thesis. His supportand availability improved my research to a substantial extent. Of course, I should notforget to thank my colleagues at the Center for Economic Studies (CES) and also atthe Ifo Institute for Economic Research whose numerous comments and discussions atinternal seminars, but also during lunch and co ffee breaks, contributed to this work.Many have also supported me in proof reading preliminary versions. In addition, I amgrateful to numerous CES visitors who have stimulated my work as well, both throughcomments and ideas for further research. Representatively, I mention Ray Riezmanwho motivated me writing Chapter 6. Among my colleagues from the department ofeconomics, I am especially grateful to Simone Kohnz for her critical and very helpfulcomments.

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The Impact of Globalisation
with Rigid Labour Markets
Inauguraldissertation
zur Erlangung des Grades
Doctor oeconomiae publicae (Dr. oec. publ.)
an der Ludwig-Maximilians-Universität München
2006
vorgelegt von
Tobias Seidel
Referent: Prof. Dr. Dr. h.c. Hans-Werner Sinn
Korreferent: Prof. Dr. Peter Egger
Promotions-
abschlussberatung: 07. Februar 2007Acknowledgements
Firstandforemost,IwouldliketothankmysupervisorHans-WernerSinnforhisadvice
and encouragement during my Ph.D. studies. He provided me with the opportunity to
work in a very inspiring environment. I am also very much indebted to Peter Egger for
uncountable fruitful discussions and comments on all parts of this thesis. His support
and availability improved my research to a substantial extent. Of course, I should not
forget to thank my colleagues at the Center for Economic Studies (CES) and also at
the Ifo Institute for Economic Research whose numerous comments and discussions at
internal seminars, but also during lunch and co ffee breaks, contributed to this work.
Many have also supported me in proof reading preliminary versions. In addition, I am
grateful to numerous CES visitors who have stimulated my work as well, both through
comments and ideas for further research. Representatively, I mention Ray Riezman
who motivated me writing Chapter 6. Among my colleagues from the department of
economics, I am especially grateful to Simone Kohnz for her critical and very helpful
comments. In the summer 2006, I greatly benefitted from the invitation of the Bank
of Finland. During my research visit there, I found the perfect environment to finish
my dissertation.
Of course, I also thank my parents for supporting me along the entire way. Last,
but certainly not least, I am grateful to Alexandra Golem for all her patience and
refreshing non-economic conversations.
Tobias Seidel.Contents
1Introduction 1
2 Globalisation from a historical perspective and recent trends 9
2.1Trade.................................... 1
2.1.1 Obstaclestocommoditymarketintegration........... 1
2.1.2 Trade flowsfromahistoricalperspective............. 14
2.1.3 Germany’s situation in the face of EU’s Eastern Enlargement. . 17
2.2 Capital markets and financialintegration................. 20
2.2.1 Capitalcontrols........................... 20
2.2.2 Capital flowsfromahistoricalperspective............ 21
2.2.3 EasternEuropeandGermany’sshareinFDI........... 24
2.3Migration-theintegrationoflabourmarkets............... 27
2.3.1 Migrationpolicies.......................... 27
2.3.2 Migration flowsfromahistoricalperspective........... 28
2.3.3 MigrationpotentialfromEasternEurope............. 32
2.3.4 Immigrationandlabourmarkets.................. 34
2.4Conclusions................................. 36ii CONTENTS
3 Labour markets - institutions and performance 37
3.1Labourmarketinstitutions......................... 38
3.1.1 Tradeunionsandemployers’organisations............ 38
3.1.2 Bargainingsystems 41
3.1.3 Minimum wages and implicit wage floors............. 4
3.1.4 Employmentprotectionlegislation(EPL)............. 52
3.1.5 Regulationofholidaysandworkingtime. 57
3.1.6 Overall evaluation of labour market flexibility.......... 57
3.2Labourmarketreformsinselectedcountries............... 60
3.3Labourmarketperformance........................ 6
3.3.1 Labour costs............................. 6
3.3.2 Unemploymentandemploymenttrends.............. 68
3.3.3 Hoursworked,paidleaveandstrikes............... 72
3.4Conclusions................................. 73
4 Factor mobility with rigid wages - a simple model 75
4.1Themodel....... 78
4.2Autarky................................... 81
4.3 Integration with flexiblewages....................... 82
4.3.1 Capitalmobility 82
4.3.2 Labour mobility........................... 85
4.4Integrationwithrigidwages........................ 87
4.4.1 Endowments,wagesandunemployment.............. 8
4.4.2 Capitalmobility........................... 90CONTENTS iii
4.4.3 Labour mobility........................... 96
4.4.4 Capital and labour mobility . . ..................10
4.5Conclusionsandpolicyimplications....................101
Appendix.....................................103
5 The Heckscher-Ohlin model with rigid wages 105
5.1Factormobilityinatwo-sectoreconomy.................107
5.2Thepathologicaltradeboom........................11
5.2.1 RigidwagesintheHeckscher-Ohlinmodel............11
5.2.2 Thelargeopeneconomy......................14
5.2.3 Thesmalopeneconomy18
5.3Aremedyforthepathology........................123
6 Theshort-andmedium-rune ffects of trade with rigid wages 125
6.1 The minimum wage .............................127
6.2Themodel..................................129
6.2.1 Theshortrun............................129
6.2.2 Themediumrun..........................137
6.3Transitiontothelongrun.........................145
6.4Conclusions......146
Appendix.....................................148
7 Agglomeration and imperfect labour markets 151
7.1Themodel............153
7.1.1 Ananalyticalytractablecore-peripherymodel..........153iv CONTENTS
7.1.2 Thefairwageconstraint......................156
7.2 Short-run equilibrium ............................158
7.3Long-runequilibrium.159
7.4Conclusions......167
Appendix.....................................168
8 Conclusions and policy implications 177
Bibliography 189Chapter 1
Introduction
The public debate reveals that people are unsettled about the impact of the current
globalisation wave. News about job losses fuel this unrest regularly. It is a matter
of fact that firms relocate their production activity to low-wage countries in Eastern
Europe and the Far East, or specialise in more capital intensive fabrication in order
to withstand international competition and to maximise profits. Although firms have
always beeninvesting abroadandglobalisationis not at all anewphenomenon, the fall
of the Iron Curtain and the rise of China and other East Asian economies have created
new investment and trade opportunities, and have thereby accelerated the process of
global market integration. Due to their proximity to the new markets in the East,
Western European countries seem to be especially a ffected. Low-wage competition
literally takes place in their backyard.
Economic theory basically stresses the advantage of market integration. Since the
times of Adam Smith and David Ricardo, trade has been viewed as welfare increasing,
as all participating countries can extend their consumption possibilities. In the early
20thcentury, EliHeckscherandBertil Ohlinintroducedanewtheorythatalsoallowed
theanalysisofthedistributivee ffectsoftrade. Whiletheexistingresultofwelfaregains
for all participating countries remained, the theory claimed that there are winners and
losers of the process in each country. The factor that used to be relatively scarce in
autarky and becomes less so in a global world, must accept a lower remuneration and2 INTRODUCTION
vice versa. This implies that (low-skilled) workers in capital abundant countries must
expect lower wages, whereas capital owners benefitfrommoreprofitable investment
opportunities around the world. Although the winners win more than the losers lose,
there still remains a fundamental social problem that societies have to solve. Income
dispersion, the gap between the rich and the poor, tends to widen.
To protect citizens against economic uncertainties, industrialised countries have
installed welfare systems that are partly designed in a very generous way. It is not
uncommon for the state to regulate employment conditions such as hiring and firing,
minimum wages, temporary contracts or working time and holidays. Furthermore, the
social insurance systems provide replacement income for unemployed workers. On the
one hand, the tax and benefit system in fact compresses the wage distribution, but on
the other hand simultaneously distorts economic decisions. For instance, unemploy-
ment benefits define the reservation wage for low-wage workers and thereby inhibit
wage flexibility in the lower part of the distribution. Of course, minimum wages ex-
hibit the same e ffect. As the Heckscher-Ohlin model predicts a decline in real wages
for low-skilled labour, rigid wages cause unemployment and thereby exert detrimental
e ffects on employees. What was originally intended to protect workers and contribute
to higher welfare through more security, turns out to retard structural change and
disfavours large parts of the work force in the presence of globalisation forces. In
fact, many European states have experienced a rising trend in unemployment since the
1970s.
Furthermore, the mentioned results of the classic and neoclassic trade models only
hold true if wages adjust perfectly to exogenous shocks and full employment is main-
tained. This ensures that the necessary structural change, which is the root for welfare
gains, can take place. The labour market is central as it has to absorb the adjustment
pressure caused by international competition. Workers have to be transferred from
shrinking to booming sectors. While the literature on trade and factor mobility with
flexible labour markets discusses every imaginable e ffect, the scientific output consid-
ering rigid labour markets appears comparably less. Nevertheless, there are seminal