Introduction

When several regions get integrated into a single political entity, many issues arise because of asymmetries across those regions: One region may be richer than another, or better endowed in skills or physical capital. Regions also are of different sizes and exert different political weights in common decision-making.

A paradigmatic example of that process is provided by German reunification: One region was poorer and smaller than the other, and its political decomposition implied that most of the relevant decisions would be made by West Germany. Another example is Italy, where the north's larger industrial base makes it dominant in several respects.

An issue that may be particularly relevant for the integration of European countries or regions is wage determination: In many countries, wages are set by collective bargaining at the sectoral level, and the associated agreements apply to every region. When there are large political and economic asymmetries across regions, wage rates at the national level are likely to be determined by the interests of the dominant region. Thus, in Italy, where the north's unemployment rate is much lower than that in the south, it has been found that national wages are much more reactive to northern unemployment rates than to southern rates (e.g., Di Monte, 1992). In Germany, a very rapid pace of wage convergence between the two regions had been agreed upon after unification, thus generating excess unemployment in the east. See Sinn and Sinn (1992) for a description of many aspects of the German reunification process, including the evolution of unemployment and how eastern wages were negotiated; see also Dornbusch and Wolf (1992).