chapter  10
20 Pages

Harmonization of Social Policies

In a customs union, where restrictions on factor movements are maintained, free trade is likely to reduce differences in wage levels

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but will fail to equalize wages between countries.3 Freeing of factor movements would further reduce wage disparities, although psychological and sociological obstacles to migration and incomplete information on job possibilities would continue to account for wage inequalities, as demonstrated by North-South disparities in the United States. Nevertheless, in view of our argument, inequalities in wage levels will not falsify competitive-cost conditions and there is no need for equalizing wages. On the other hand, a policy aimed at forcible equalization in an integrated area is bound to have harmful effects, since it would lead to balance-of-payments difficulties and unemployment in the absence of factor mobility, and it would give rise to undesirable capital movements if factors were free to move.