A Note on Free Trade Agreement and Wage Bargaining Structure

Mezzeti and Dinopoulos (1991) show that a free trade agreement (trade liberalization) decreases wage rate. However, Naylor (1998) shows that trade liberalization increases wage rate. Both papers consider tariff as exogenously given. In this paper we show that these conflicting results can be nested into a model of international duopoly with a more general wage bargaining structure. Tariff is endogenously determined in our model. In addition, we also derive crucial implications of the wage bargaining structure on the sustainability of trade liberalization