Foreign Competition, Multinational Firms, and the Effects of One-Sided Wage Rigidity

The paper studies the effects of a one-sided minimum wage in a two-country model of intra-industry trade, in which multinational firms arise endogenously. With positive levels of intra-industry trade the adverse employment and welfare effects of an asymmetric minimum wage are significantly larger than in a non-trading economy. Multinational firms generally mitigate the effect somewhat. Even though factor prices are not equalised across countries, a (binding) wage floor in one country will prop up wages in the other. The flexible wage country is insulated from shocks caused by factor accumulation in the rigid wage country, while an increase in the labour supply of the latter economy may have profound impacts on labour market outcomes in both countries.