Factor Market Linkages in a Global Economy.

This paper considers linkages between national labour markets in a global economy, extending the existing analyses to the empirically important case where factor price equalization does not hold. Removing the assumption of factor price equalization allows the divergent wage experience as well as unemployment experience of Europe and America to be explained. Europe's minimum wage forces it out of the labour intensive industry, leaving it specialised in the skill intensive industry, and with a lower return to skill than America. Under these conditions the entry of labour intensive NICs into world markets pushes down American wages and alters its economic structure (which were unchanged under factor price equalization), and reduces European unemployment (which increased under factor price equalization).