Globalisation and Labour Markets Research Paper 2005 / 05 Fair Wages , Unemployment and Technological Change in a Global Economy

In this paper we analyze the effects of global and national technological change on employment levels and relative wages in an integrated two-country world (“Europe” and “America”), where both countries are characterized by equilibrium unemployment due to fair wage constraints. The asymmetry between the two countries arises from country-specific preferences towards wage inequality, with Europe's preferences being more egalitarian. Furthermore, we look at trade integration between this two-country world and a third country (“low wage south”). We derive an analytical tool, the Virtual Integrated Equilibrium, that allows us to adapt Dixit and Norman's well known Integrated Equilibrium approach to a situation where both trading countries have endogenous unemployment levels. JEL classification: F11, F16