Foreign Competition, Multinational Firms, and 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 equalized 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 labor supply of the latter economy may have profound impacts on labor market outcomes in both countries.