Economic internationalisation and the distribution of income : a comparison of the cases of Germany and the U.S.

Abstract

This study compares the effects of economic internationalisation on the functional distribution of labour income in the U.S. and Germany. The benchmark for assessing the empirical analyses theoretically is the general equilibrium framework of international trade theory. Focusing on general equilibrium frameworks stems from the insight that economic internationalisation in the form of international trade is a general equilibrium phenomenon and not only an exogenous shock that can be analysed by means of partial equilibrium approaches. Endogenising human capital supply shows how to reconcile partial equilibrium labour market issues established by human capital theory with the general equilibrium-led debate on trade and the functional distribution of labour income. This approach can also be implemented in models that try to adequately consider the European case by modelling involuntary unemployment, thus applicable to the German case. Moreover, despite the clearcut implications of the flip-side hypothesis, involuntary unemployment also concerns the case of the U.S., where at least in the shorter run unemployment always reappears, even if labour market characteristics differ from those of the German labour markets concerned by persistence. In this connection, this study shows that a trade, wages, and involuntary unemployment debate should always be aware of the complex reality of labour market rationing and its distributional implications both in the U.S. and Germany.