Does Globalization Lead to a Rat Race of National Labor-Market Institutions?

Abstract

Since just around 30 years we observe that the labor’s share of the national income decreases in most countries. In this paper, we introduce an endogenous overlapping generation growth model with an institutional setting of the labor market to show that the changes of the labor-market institutions are one main reason for the decrease of the labor’s share. These changes are mainly caused by the increasing globalization resulting in open capital markets and as a consequence in a competition between countries with respect to the labor-market institutions. In the long run, all will suffer. The only ways to stop this rat race are capital controls or international agreements on the labor market institutions.

Key words: Endogenous growth, Open economies, Labor’s share, Labor market institutions.
JEL: F12, F59, F43.