Working Paper: CEPR ID: DP5100
Authors: Gilles Saint-Paul
Abstract: Trade liberalization is often met with sharp opposition. Recent examples include the so-called ?Bolkestein? directive, which allows service providers from a given EU member to temporarily work in another member country. One way to view such a reform is that it simply widens the range of goods that are tradable. This kind of reform is analysed in a two-country Dornbusch-Fischer-Samuelson style model, where labour cannot relocate to another sector upon a non-expected increase in the range of goods that can be traded.The effect of liberalization on the terms of trade tend to favour the poorer country (the ?East?), if (as assumed) the most sophisticated goods are tradable before reform. Second, under ex-post liberalization, there exists a class of workers in the West who are harmed because they face competition from Eastern workers and cannot relocate to other activities. But if the East?s economy is relatively small, their wage losses are not very large. Things are different, however, if there exist asymmetries in labour market institutions, such that upon reform, labour can relocate in the East but not in the West. Some workers in the West can then experience very large wage losses. Thus, rigid labour markets in the West magnify opposition to reform there.
Keywords: Bolkestein Directive; Comparative Advantage; European Integration; Labour Market Institutions; Labour Mobility; Terms of Trade; Trade Liberalization
JEL Codes: F11; F13; F16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | terms of trade (favor the East) (F14) |
| Trade liberalization (F13) | wage losses for some Western workers (F66) |
| Rigid labor markets in the West (J48) | wage losses for certain workers (J32) |
| Labor market rigidities in the West (J48) | opposition to trade reforms (F13) |
| Asymmetric labor mobility (J62) | wage losses for Western workers (J38) |