Unemployment in an Interdependent World

Figure A4: Change in real wages [on the vertical axis] as a function of trade costs and
external economies of scale for a given change of b1 from 0.4 to 0.8.

If ν is low, the competitiveness and relative composition of home and foreign varieties
drives the results. However, for high ν’s the absolute market size is important. We know
from Figure A2 that the real wage change should increase in country 1 and decrease in
country 2, if country 1 becomes smaller and external economies of scale are not present,
i.e., ν = 0. However, if external economies of scale are important, the real wage change in
country 1 will be lower and may even turn negative, as the smaller home market implies
fewer home varieties, leading in equilibrium to lower relative real wages due to a relative
increase in the costs of living. The change in real wages in country 2 becomes smaller,
as external economies of scale become more important because country 2 now has more
varieties compared to country 1, leading to a relative decrease of the aggregate price level.

A2.4 How important is firm-level heterogeneity?

Result A5 [How firm heterogeneity conditions spill-overs]

The larger the shape parameter of the Pareto distribution describing the distribution of
firm-level productivity, the higher is the increase in real wages of country 1 and the lower
are the decreases in real wages of the trading partner countries, triggered by a given in-
crease in unemployment benefits in country 1.

Result A5 is plotted in Figure A5. Similar as for unemployment, the real wage change
decreases with increasing similarity of firms. The reason is again that the competitiveness
channel is weakened, and that spill-overs are weak if firms are more homogenous as only
few firms export.

for the aggregate good in country 1.

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