Industrial Policy in the Presence of Wage Distortion: The Case of the US Auto and Steel Industries

This paper examines the welfare effects of protection in two sectors characterized by high wage premia, autos and steel, to determine if protection is justified to correct for the labor misallocation due to wage premia. If wage premia are exogenous, under most product market structures, labor misallocation is too small to justify protection. More importantly, we argue that due to union influence in autos and steel, the wage premium is endogenous. If this is the case, then wage premia may even exacerbate the welfare costs of protecti.