Globalization, EU Enlargement And Income Distribution

Advanced industrial countries have been exhibiting a steady decline of the labor income shares in the last two decades. The authors explain this phenomenon by resorting to the old Stolper-Samuelson theorem. The conclusions concerning the impact of free trade on the income distribution are unambiguous in a Heckscher-Ohlin world with two countries, two goods and two factors of production (capital and labor). In contrast, the consequences of FDI from the capital abundant country (EU) to the labor abundant CEEC are ambiguous. Both scenarios are investigated theoretically and then simulated with a hypothetical two country CGE model, including the EU and the CEEC.