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Unemployment Effects of Trade with a Low-Wage Country: A Minimum-Wage Model with Sector-Specific Factors

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Abstract

Contrary to conventional wisdom, this paper shows that a high-wage economy can paradoxically reduce its level of aggregate unemployment by engaging in international trade with a low-wage country. We demonstrate this possibility after introducing a minimum wage into the basic specific-factor model (with immobile capital and mobile labor), even though the opposite result is known to arise in the longer-run framework of the standard Heckscher-Ohlin-Samuelson model (with both inputs mobile). Our result provides a cautionary note for public-policy discussions that promote trade barriers as a way to reduce unemployment.

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  • Richard A. Brecher & Zhihao Yu, 2020. "Unemployment Effects of Trade with a Low-Wage Country: A Minimum-Wage Model with Sector-Specific Factors," Carleton Economic Papers 20-01, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:20-01
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    References listed on IDEAS

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    1. Lloyd A. Metzler, 1949. "Tariffs, International Demand, and Domestic Prices," Journal of Political Economy, University of Chicago Press, vol. 57(4), pages 345-345.
    2. Daron Acemoglu & David Autor & David Dorn & Gordon H. Hanson & Brendan Price, 2016. "Import Competition and the Great US Employment Sag of the 2000s," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 141-198.
    3. Lloyd A. Metzler, 1949. "Tariffs, the Terms of Trade, and the Distribution of National Income," Journal of Political Economy, University of Chicago Press, vol. 57(1), pages 1-1.
    4. Davis, Donald R, 1998. "Does European Unemployment Prop Up American Wages? National Labor Markets and Global Trade," American Economic Review, American Economic Association, vol. 88(3), pages 478-494, June.
    5. Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(1), pages 98-116.
    6. Ruffin, Roy & Jones, Ronald, 1977. "Protection and real wages: The neoclassical ambiguity," Journal of Economic Theory, Elsevier, vol. 14(2), pages 337-348, April.
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    More about this item

    Keywords

    Trade; Unemployment; Minimum wage; Sector-specific factors;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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