Working Paper: CEPR ID: DP1597
Authors: Gilles Saint-Paul
Abstract: This paper studies the effect of economic integration of two regions on the mobility of skilled and unskilled workers across regions and on the resulting location of industrial activity. In particular, it studies what happens when wages in both regions are set by the unions of the ?West? ? the region with a greater initial relative stock of human capital. We show that in some circumstances, it is in the interest of the West?s unions to set a speed of wage convergence greater than equilibrium, thereby generating unemployment in the ?East?. This slows the migration of human capital towards the East, but quickens the migration of raw labour towards the West. A greater share of economic activity is eventually located in the western region. Unions in the West will benefit from this, provided human capital has low migration costs relative to raw labour.
Keywords: unemployment; regional integration; unions; wage formation; political economy; migration; human capital; centralized wage setting
JEL Codes: E24; J3; J5; J61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Faster wage convergence (F62) | Increased unemployment in the eastern region (F66) |
| Increased unemployment in the eastern region (F66) | Slowed migration of skilled human capital (J61) |
| Increased unemployment in the eastern region (F66) | Accelerated movement of unskilled raw labor towards the west (F66) |
| Wage convergence speeds set by western unions (F16) | Migration dynamics of labor (J61) |
| Faster wage convergence (F62) | Benefits for western insiders in the short run (P17) |
| High migration costs for raw labor relative to human capital (J61) | Greater incentives for western unions to accelerate wage convergence (F16) |