TY  - JOUR
AU  - Davis,Donald R.
TI  - Does European Unemployment Prop up American Wages?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5620
PY  - 1996
Y2  - June 1996
UR  - http://www.nber.org/papers/w5620
L1  - http://www.nber.org/papers/w5620.pdf
N1  - Author contact info:
Donald R. Davis
Columbia University, Department of Economics
1038 Intl. Affairs Building
420 West 118th St.
New York, NY 10027
Tel: 212/854-4037
Fax: 212/854-8059
E-Mail: drd28@columbia.edu
AB  - We consider trade between a flexible wage America and a rigid real wage Europe.  In a benchmark case, a move from autarky to free trade doubles the European unemployment rate, while it raises the American unskilled wage to the high European level. Entry of the unskilled South to world markets raises unemployment in Europe.  But Europe's commitment to the high wage completely insulates America from the shock.  Immigration to America raises American income, but lowers European income dollar-for-dollar, while European unemployment rises one-for-one. We consider a stylized game of the choice of factor market institutions.  Mitterand's Europe chooses a high minimum wage and Reagan's America chooses a flexible wage for the unskilled. Paradoxically, unskilled workers are worse off in Europe.  Trade equalizes wages, but Europeans bear all of the unemployment required to sustain the high wage.
ER  -