Essays on Labor Market Effects of Integration in Unionized Economies

Abstract

This thesis examines the effect of integration on wages when the economy is partially unionized. The first part sets up a general equilibrium model where wages in one sector are set by a monopoly union. The unionized sector of the economy also utilizes a factor (capital) which is internationally mobile. Capital mobility is explicitly modeled in terms of mobility costs. The model is characterized by inter-industry wage differentials and a possibility of temporary unemployment in the unionized sector. Integration is modeled in terms of reduced barriers to product trade, or easier factor (capital) mobility. I show that though capital mobility weakens unions, the net effect on workers may not be negative if this either raises domestic investment, or if the union distortion is large enough. In general the impact of trade liberalization on real wages is ambiguous. However workers bear a larger burden from trade liberalization when capital is more footloose.

This second half of the thesis empirically examines whether unions face a threat from outward foreign direct investment by their industry, and whether this changes their response to tariff protection. I combine worker level data for the US, with industry level data on openness and other industry characteristics for the years 1990-1996. The results suggest that unions do face a threat from FDI, though this threat effect is not large in comparison to other industry characteristics. I also find evidence that union response to tariff changes vary with the level of the threat effect. Our results suggest that unions use protection to raise employment probability in low threat industries, and to raise premiums in high threat industries.