There have been and continue to be a remarkable number of cases in which high-wage and low-wage countries have become partially integrated. The increasing economic interdependence of the U.S. and Japan beginning in the 1950's is one example. The high-wage European community has added Ireland, Spain, Greece and Portugal. More recently there is the integration of West and East Germany; and of Western and Eastern Europe generally. Also there is the increasing integration of the U.S. and Mexico and the partial integration of the U.S. with the rest of Latin America. This project studies theoretically and empirically the consequences of partial economic integration of high-wage and low-wage countries. The goal is to understand what happens to output mix, factor returns, employment, unemployment, and prices as two or more regions with different wages are partially or fully integrated. One contribution of this research will be an assessment of the value of competing models as vehicles for understanding partial economic integration. A variety of different economic models will be considered, differing in terms of their assumptions regarding the degree of factor mobility between industries and between countries, the nature of the production process and the character of competition in goods and factor markets. Another contribution of this project will be the assessment of the impact of various policy measures on the performance of an economy in the midst of an integration episode. The possible policy measures include isolationist commercial policy, industrial subsidies, unemployment compensation, adjustment assistance, and educational subsidies.
