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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