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Making Sense of Bolkestein-Bashing: Trade Liberalization under Segmented Labor Markets

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bolk1.dvi Making sense of Bolkestein-bashing: trade liberalization under segmented labor markets Gilles Saint-Paul∗ Université de Toulouse 1, CEPR and IZA October 23, 2006 ABSTRACT: Trade liberalization is often met with sharp opposition. Re- cent examples include the so-called “Bolkestein” directive, which allows service providers from a given EU member to temporarily work in another member country. One way to view such a reform is that it simply widens the range of goods that are tradeable. This kind of reform is analyzed in a two-country Dornbusch-Fischer-Samuelson style model, where labor cannot relocate to an- other sector upon a non expected increase in the range of goods that can be traded. The effect of liberalization on the terms of trade tend to favor the poorer country (the “East”), if (as assumed) the most sophisticated goods are trade- able before reform. Second, under ex-post liberalization, there exists a class of workers in the West who are harmed because they face competition from East- ern workers and cannot relocate to other activities. But if the East’s economy is relatively small, their wage losses are not very large. Things are different, however, if there exist asymmetries in labor market institutions, such that upon reform, labor can relocate in the East but not in the West. Some workers in the West can then experience very large wage losses. Thus, rigid labor markets in the West magnify opposition to reform there. JEL: F16, F11, F13. Keywords: Trade liberalization, European integration, Bolkestein directive, labor mobility, labor market institutions, comparative advantage, terms of trade. ∗I am grateful to seminar participants at the Bank of Italy; IGIER, Bocconi University; the European University Institute; the European Summer Symposium in Labour Economics, Ammersee; the University of Essex; The INTAL conference, IADB, San Jose de Costa Rica; the editor, Kala Krishna, and two anonymous referees for helpful comments and suggestions. 1 1 Introd

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