Trade Liberalization and Unemployment

By Pierre-Richard Agénor, Joshua Aizenman

February 1, 1995

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Pierre-Richard Agénor, and Joshua Aizenman. Trade Liberalization and Unemployment, (USA: International Monetary Fund, 1995) accessed December 28, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the effect of trade reform on wages and unemployment in a two-sector, three-good economy in which labor is imperfectly mobile across sectors. Wages in the export sector are set so as to minimize turnover costs. The analysis shows that a reduction in tariffs, coupled with an adjustment in lump-sum taxes to equilibrate the government budget, lowers wages in all production sectors in the short and the medium run but has an ambiguous effect on unemployment. Although employment and production of exportables expand in the medium run, the unemployment rate may rise or fall depending on whether the elasticity of wages in the export sector with respect to wages in the nontraded goods sector is lower or greater than unity. Potentially adverse effects may be mitigated in the long run, however, as a result of induced shifts in the structure of production activities.

Subject: Employment, Exports, International trade, Labor, Labor force, Labor markets, Tariffs, Taxes, Wages

Keywords: Efficiency consideration, Efficiency wage, Employment, Exports, Global, Goods sector, Labor force, Labor market, Market-clearing wage, Product wage, Tariffs, Wage elasticity, Wage ratio, Wages, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1995/020
Stock No:

WPIEA0201995
ISBN:

9781451843811
ISSN:

1018-5941

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