Working Paper: CEPR ID: DP435
Authors: Jaime de Melo; David Tarr
Abstract: This paper examines the welfare effects of protection in two sectors characterized by high wage premia, autos and steel, to determine if protection is justified to correct for the labor misallocation due to wage premia. If wage premia are exogenous, under most product market structures, labor misallocation is too small to justify protection. More importantly, we argue that due to union influence in autos and steel, the wage premium is endogenous. If this is the case, then wage premia may even exacerbate the welfare costs of protecti.
Keywords: wage premia; labour misallocation; union power; quantitative restraints; welfare costs; general equilibrium
JEL Codes: 820; 830; 420
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage premia (exogenous) (J31) | labor misallocation (small) (J79) |
| wage premia (endogenous) (J31) | welfare costs of protection (increase) (D69) |
| protection (D18) | wage distortions (increase) (J39) |
| wage distortions (increase) (J39) | second-best benefits of labor reallocation (decrease) (F16) |
| union behavior (higher weight on wages) (J51) | welfare gains from protection (minimal) (D69) |
| wage premia (J31) | justification for protection (not supported) (F52) |