DP1020 Locational Competition versus Cooperation in Labour Markets: An Implicit Contract Reinterpretation
The need for locational competition among labour markets arises when labour is immobile. At the same time market clearing under such conditions can lead to wage and income variability. In such cases demand for insurance against regional shocks arises, which can be provided by nationwide collective bargaining and other national institutions in the spirit of the implicit contract literature. In this interpretation, the desirability of locational competition depends on the nature of shocks which affect the regions. Real wage and other types of flexibility will be invoked by localities only in response to systematic shocks. We present evidence that West German and other European experiences are more consistent with an insurance contract interpretation, while US regional labour markets are characterized by high regional mobility, rendering insurance less relevant.
