Nottingham Centre for Research on
Globalisation and Economic Policy (GEP)

GEP Research Paper 06/50

National Labour Markets, International Factor Mobility and Macroeconomic Instability

Marta Aloi and Teresa Lloyd-Braga

Abstract

We analyze how global economic integration of factor markets affects the stability of the macro economy, with respect to expectations-driven fluctuations, when countries differ in their labour market institutions. It is shown that, due to the occurrence of equilibrium indeterminacy, liberalization of capital movements is likely to be accompanied by persistent fluctuations at the world level, while allowing also for labour movements may bring macroeconomic stability. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries. If the average firm size in a country operating under perfect competition and full employment is small relative to a country with rigid wages and unemployment, then free migration reduces unemployment, narrows wage differentials and expands world output.

Issued in December 2006.

This paper is available in PDF format .

Nottingham Centre for Research on Globalisation and Economic Policy

Sir Clive Granger Building
University of Nottingham
University Park
Nottingham, NG7 2RD

Enquiries: hilary.hughes@nottingham.ac.uk