Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 11/11: Product and Labor Market Deregulation in Unionized Oligopoly with Asymmetric Countries

Egger Hartmut () and Frode Meland ()
Additional contact information
Egger Hartmut: University of Bayreuth, Postal: University of Bayreuth, RW Building II, Chair of Economics II - International Macroeconomics and Trade, Prof. Dr. Hartmut Egger, , D-95440 Bayreuth, Germany, ,
Frode Meland: University of Bergen, Postal: Department of Economics, Fosswinckelsgt. 14, 5007 Bergen, Norway

Abstract: This paper sets up a general oligopolistic equilibrium trade model for two integrated countries that are similar in all respects except of the prevailing labor market institutions. In one country, the labor market is perfectly competitive, while in the other country labor unions are active in a subset of industries. The differences in labor market institutions are a source of comparative advantage, which crucially impact inter-industry trade and welfare in the open economy. In this setting, we study the trade and welfare implications of labor market deregulation and compare these implications with the consequences of product market deregulation. Thereby, we take into account that labor market reforms are subject to national policy decisions and thus associated with unilateral intervention, while product market deregulation is determined at an international – for instance European – level and thus associated with coordinated intervention in both economies. As a key result, we find that both forms of policy intervention generate a conflict of interest between the two trading partners and that welfare losses materialize for the country with the competitive labor market regime whenever global gains are realized.

Keywords: General oligopolistic equilibrium; Labor unions; Comparative advantage Product and labor market deregulation

JEL-codes: F12; F16; J51

30 pages, October 5, 2011

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