Title: Trade and the (Dis) incentive to reform labor markets
Description: "In a  closed economy general equilibrium model, Hopenhayn and Rogerson (1993) find  large welfare gains to removing firing restrictions.  We explore the extent to  which international trade alters this result.  When economies trade, labor  market policies in one country spill over to other countries through a change  in the terms of trade.  This reduces the incentive to reform labor markets.  In a  policy game over firing taxes between countries, we find that countries  optimally choose positive levels of firing taxes.  A coordinated elimination of  firing taxes yields considerable benefits.  This insight provides some  explanation for recent e.orts toward labor market reform in the European  Union"--Federal Reserve Bank of Philadelphia web site.
Subjects: Job security, Labor market
Places: Europe