IS LABOR RIGIDITY HARMING EUROPE COMPETITIVENESS - THE EFFECT OF JOB PROTECTION ON THE PATTERN OF TRADE AND WELFARE

We develop a model to analyse the implications of firing costs on inte rnational specialization. To avoid paying the firing cost, the country with a rigid labor market will. tend to produce relatively secure goo ds, at a late stage of their product Life cycle. An international prod uct cycle emerges where new goods are first produced in the low firing cost country and then move to the high firing cost country. An increa se in firing costs in the high firing cost country lowers welfare ther e and increases welfare in the low firing cost country. It also narrow s the range of goods produced by the high firing cost country, biasing its specialization towards more mature goods. (C) 1997 Elsevier Scien ce B.V.