Abstract
We consider a standard two-country environment, where one of the two countries has a rigid labor market, and analyze how global economic integration affects the economies with respect to expectations-driven cycles and steady state welfare. We show that by allowing free capital mobility, equilibrium indeterminacy is exported from the rigid wage country to the world economy. If further liberalization is permitted, by allowing free movements of labor, the scope for indeterminacy is reduced and open labor markets may produce a stabilizing effect on the global macro-economy. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries, which determines the direction of migration flows.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Azariadis C., Pissarides C.: Unemployment dynamics with international capital mobility. Eur Econ Rev 51, 27–48 (2007)
Barinci J.P., Chéron A.: Sunspots and the business cycle in a finance constrained economy. J Econ Theory 97, 30–49 (2001)
Basu S., Fernald J.G.: Returns to scale in U.S. production: estimates and implications. J Polit Econ 105, 249–283 (1997)
Bertocchi G.: Labor market institutions, international capital mobility, and the persistence of underdevelopment. Rev Econ Dyn 6, 637–650 (2003)
Bertola G., Boeri T.: EMU labor markets two years on: microeconomic tensions and institutional evolution. In: Buti, M., Sapir, A. (eds) EMU and Economic Policy in Europe: The Challenge of the Early Years, Edward Elgar, Aldershot (2002)
Bhagwati, J.: The Capital Myth. Journal of Foreign Affairs, May/June (1998)
Burnside C.: Production function regressions, returns to scale, and externalities. J Monet Econ 37, 177–201 (1996)
Coimbra R., Lloyd-Braga T., Modesto L.: Endogenous fluctuations in unionized economies with capital externalities. Econ Theory 26, 629–649 (2005)
Davis D.: Does European unemployment prop up American wages? National labor markets and global trade. Am Econ Rev 88, 478–494 (1998)
Edwards, S., Lusting, N. (eds): Labor Markets in Latin America. Brookings, Washington, DC (1997)
Farmer R.: Macroeconomics of Self-fulfilling Prophecies, 2nd edn. MIT Press, Cambridge (1999)
Freeman R.: War of models: which labour market institutions for the 21st century? Labour Econ 5, 1–24 (1998)
Guesnerie R., Woodford M.: Endogenous fluctuations. In: Laffont, J.J. (eds) Advanced in Economic Theory: Proceedings of the Sixth World Congress, vol. 2, Cambridge University Press, New York (1992)
Harris J., Todaro M.: Migration, unemployment and development: a two-sector analysis. Am Econ Rev 60, 126–142 (1970)
ILO: Progress Report on the Country Studies on the Social Impact of Globalisation, Geneva (1999)
Lahiri A.: Growth and equilibrium indeterminacy: the role of capital mobility. Econ Theory 17, 197–208 (2001)
Lloyd-Braga T., Nourry C., Venditti A.: Indeterminacy in dynamic models: when Diamond meets Ramsey. J Econ Theory 134, 513–536 (2007)
Meng Q., Velasco A.: Indeterminacy in a small open economy with endogenous labour supply. Econ Theory 22, 661–669 (2003)
Obstfeld M., Taylor A.M.: Global Capital Markets. MIT Press, Cambridge (2004)
Prasad, E., Rogoff, K., Wei, S., Kose, M.: Effects of financial globalization on developing countries: some empirical evidence. IMF Occasional Papers No. 220 (2003)
Riboud, M., Sanchez-Paramo, C., Silva-Jauregui, C.: Does eurosclerosis matter? Institutional reform and labor market performance in central and eastern European Countries in the 1990s. World Bank Research Papers No. SP 0202 (2002)
Rodrik D.: Has Globalisation Gone Too Far? Institute for International Economics, Washington, DC (1997)
Sakuragawa M., Hamada K.: Capital flight, north–south lending, and stages of economic development. Int Econ Rev 42, 1–24 (2001)
Scheve K., Slaughter M.: Globalization and the Perceptions of American Workers. Institute for International Economics, Washington, DC (2001)
Shapiro C., Stiglitz J.: Equilibrium unemployment as a worker discipline device. Am Econ Rev 74, 433–444 (1984)
Weder M.: Indeterminacy in a small open economy Ramsey growth model. J Econ Theory 98, 339–356 (2001)
Author information
Authors and Affiliations
Corresponding author
Additional information
We thank an anonymous referee for insightful comments. This paper has also benefited from comments and suggestions by Spiros Bougheas, Carl Davidson, Richard Disney and Doug Nelson. Marta Aloi gratefully acknowledges the financial support of the British Academy. Teresa Lloyd-Braga gratefully acknowledges the financial support of UNICEE, Universidade Católica Portuguesa: FCEE, and the hospitality of the GEP Centre at Nottingham University.
Rights and permissions
About this article
Cite this article
Aloi, M., Lloyd-Braga, T. National labor markets, international factor mobility and macroeconomic instability. Econ Theory 43, 431–456 (2010). https://doi.org/10.1007/s00199-009-0445-1
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00199-009-0445-1