Unemployment in an Interdependent World

0.4

Country 2, Real wages

1.25-.

1.2-

1.15-

1.1 -

1.05-

1 -

0.95-

0.9

0.85

0

15

30

0.8   60

45

^b1

τ (%)

Figure A1: Country 1 labor market regulation, trade costs, and real wages [on vertical
axis] in countries 1 and 2 (=3).

A2 Wage effects

As we have demonstrated in the main text, the magnitude of the spill-over crucially
depends on the level of real wage flexibility. Hence, in parallel to the unemployment
effects described in the main text for the individual-bargaining model, we illustrate in this
Appendix the accompanying results for real wages. Due to the way how unemployment
and wages are determined in the individual-bargaining regime, real wage effects are mainly
mirror images of the unemployment effects: Whenever a policy change in one country
leads to a decrease in average productivity in its trading partners, we will not only see an
increase in unemployment in the trading partners but also a decrease in real wages.

A2.1 How domestic institutions impact outcomes world-wide

Result A1a [Globalization and labor markets]

Trade liberalization leads to higher real wages in all countries.

Result A1b [Labor market reform]

If one country increases its unemployment benefits, then real wages increase in that coun-
try.

Result A1c [Institutional spill-overs]

If one country increases its unemployment benefits, then, in all other countries, real wages
will fall.

For an illustration see Figure A1. Again Result A1a is a generalization of the results
found by Felbermayr, Prat, and Schmerer (2008) for asymmetric countries. Result A1b
stems from the fact that higher unemployment benefits increase the bargaining power of

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