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I examine the effects of globalization in countries where the employed workers support the unemployed and the governments control wages by regulating the workers' relative bargaining power. I use a general oligopolistic equilibrium model of two integrated countries with two inputs: labor and potentially footloose capital. National competition for jobs by labor market deregulation creates a distortion with suboptimal wages. The mobility of capital aggravates that distortion by increasing the wage elasticity of labor demand, which decreases wages and welfare even further. The delegation of labor market regulation to an international agent eliminates that distortion, increasing wages and aggregate welfare.

I examine how globalization affects wages and welfare in a general equilibrium model of international trade with partly oligopolistic markets. Globalization is modeled as reducing trade costs or opening up shielded sectors to trade. There is a national or international common agency that determines minimum wages for the oligopolists, either directly or through supporting labor unions. The lobbies of employers and labor unions influence that agency, relating their prospective political contributions to the latter's decisions. Both a shift from national to international regulation and a decrease in trade costs promote aggregate welfare, but decrease open-sector relative wages.

In this paper, I study the political rationale for labor market regulation. Oligopolists employ raw labor and human capital (i.e. key workers) for production and R&D. There are many jurisdictions, in each of which a self-interested policy maker can regulate/deregulate the local labor market. I show that the observed tendency to labor market deregulation results from labor market policies being set up at the local level. In small jurisdictions, the fall of income due to wage increases is so large that the labor markets are deregulated. With labor market integration, jurisdictions get larger and face less competition from outside. Then, the fall of income due to wage increases is reduced and labor market regulation becomes more attractive to workers' lobbies.