INDUSTRIAL-POLICY IN THE PRESENCE OF WAGE DISTORTIONS - THE CASE OF THE UNITED-STATES AUTO AND STEEL INDUSTRIES

This paper examines the welfare effects of protection in two high wage premia sectors-autos and steel-to determine if protection is justifie d to correct for the labor misallocation due to the wage premia. If wa ge premia are exogenous, under most product market structures, labor m isallocation is too small to justify protection. More importantly, due to union influence in autos and steel, the wage premium is endogenous . Then wage premia may even exacerbate the welfare costs of protection . With increasing returns to scale and firm entry optimal policies may be reversed, so further caution must be exercised.