National labor markets, international factor mobility and macroeconomic instability

Marta Aloi*, Teresa Lloyd-Braga

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)


We consider a standard two-country environment, where one of the two countries has a rigid labor market, and analyze how global economic integration affects the economies with respect to expectations-driven cycles and steady state welfare. We show that by allowing free capital mobility, equilibrium indeterminacy is exported from the rigid wage country to the world economy. If further liberalization is permitted, by allowing free movements of labor, the scope for indeterminacy is reduced and open labor markets may produce a stabilizing effect on the global macro-economy. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries, which determines the direction of migration flows.
Original languageEnglish
Pages (from-to)431-456
Number of pages26
JournalEconomic Theory
Issue number3
Publication statusPublished - 1 Jun 2010


  • Efficiency wages
  • Factor movements
  • Globalization
  • Indeterminacy


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