Are US wages really determined by European Labor Market Institutions?

Abstract

This paper integrates institutionally determined wage rigidities into an otherwise standard Heckscher Ohlin model of international trade. It accounts for individual heterogeneities with respect to innate abilities and analyses their implications for individual wage incomes and for individual decisions about acquiring education. The model provides a foundation for the conjectures the development of wages and unemployment rates derived from comparative cross country studies that do not consistently account for the global general equilibrium links affecting factor prices. It does not support the view that global equilibrium links cause US wages to be determined by European wage rigidities or insulate the US economy from exogenous labor supply shocks.