An observer of human affairs today will be appalled by the intensity and pervasiveness of violence in various parts of the world. Globalization and the new technologies of information make news about war, terrorism and other forms of political violence in different corners of the world varilable to everyone at a rate unprecedented in the past. The current surge of political violence is a very disturbing trend. It goes against what was expected to be a steady trend towards progress and prosperity. In fact, economic progress and development is about creating and distributing wealth, rising living standards and improving social indicators. In contrast, political violence, conflict and terrorism destroy human lives and physical assets and reduce social welfare.
Political violence is like “development in regress”. Historians and anthropologists often see political violence as related to movements of social protest against established powers and political scientists stress the often-violent response of the state to these challenges. Economists working in this subject highlight the monopoly of coercion and force by the state and see political violence as related to failures of the state to maintain that monopoly. Political violence is not a homogenous phenomenon and it may take various forms. Internal armed conflict, often between regular armies and rebel, ethnic or revolutionary groups are related to conflicting political agendas of competing groups that cannot be resolved by pacific means due to failures of conflict management institutions.
The recent housing market crisis has brought attention to the so&called subprime mortgage market, which ex& perienced exponential growth over the past few years. The share of subprime mortgages to total originations increased from 6% in 2002 to 20% in 2006. As of 2006, the value of U.S. subprime mortgages was estimated at $1.5 trillion, or 15% of the $10 trillion residential mortgage market.1 Subprime mortgages account for a significant part of the recent increase in household mortgage debt in the United States, from about 60% of GDP in 2003 to above 75% of GDP in 2006.2 It is widely believed that subprime lending has played a major role in the housing market meltdown in 2007.
Unlike traditional prime mortgages, subprime mortgages are normally made out to higher&risk borrowers who buy pricey houses relative to their income level and make little or no downpayment. Often, these mortgages come with incentives including low initial teaser rates, which later reset to higher rates. As a result, subprime mortgage loans have a much higher rate of default than prime mortgage loans.
The current expansion in international trade and capital flows has linked the economic performances of the developed countries to those of the developing countries as never before. However, the process of integration has been much faster for capital markets than for labor markets and their institutional structure. Within the ongoing debate on the impact of globalization, its potential connection with the issue of labor markets rigidities has not yet been addressed. The main contribution of this paper is therefore to uncover the implications of differential labor market structures for an integrated world.
The crucial questions that have been raised, and that are still largely unanswered, are the following: Does globalization induce convergence of income and wages? Do workers in rich countries always lose from globalization? And what is the impact on workers in the developing countries? With respect to the first question, i.e., the relationship between globalization and convergence, perfect international capital markets are conventionally viewed as an element that strengthens the case for convergence, and can indeed assure its instantaneous achievement. In this paper we explore the potential impact on income convergence of differential labor market structures, thus departing from the perfect-competition benchmark with a special focus on to the markets for labor. The second and third questions have to do with the effect of globalization on wages, both in the developed and the developing countries, and in particular with its implications for the relative balance of power between capital and labor within each country. The framework we provide, which distinguishes between different labor market structures, allows to evaluate these questions from a novel perspective.
