Globalisation, Wages and Unemployment : An Economic Geography Perspective

This paper is about the impact of globalisation on (low-skilled) labour. We build a new economic geography model in which two types of labour (low and high-skilled) are distinguished and in which, due to wage rigidities, unemployment may arise. We also introduce two types of transportation costs (for goods and services) to allow for a more intricate analysis of the effect of globalisation. A first conclusion is that the impact on wages and unemployment depends critically on the level and type of the transportation costs that is being reduced, the distribution of low and high skilled labour and notably also on the degree of wage flexibility. Globalisation is by no means always bad news for the low-skilled. On the contrary, in some of the simulations that we performed, the low-skilled are better off in terms of their relative wage or the unemployment outcome as globalisation progresses. A final conclusion is that it matters a great deal for the effects of globalisation whether or not wages are rigid