Trade liberalization and unemployment

Pierre Richard Agénor, Joshua Aizenman

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

This paper examines the effect of trade reform on wages and unemployment in a twosector, three-good economy in which labour 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 and 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 non-traded 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.

Original languageEnglish
Pages (from-to)265-286
Number of pages22
JournalJournal of International Trade and Economic Development
Volume5
Issue number3
DOIs
StatePublished - 1 Jan 1996
Externally publishedYes

Keywords

  • Trade liberalization
  • Unemployment
  • Wage expectations

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development
  • Aerospace Engineering

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