Trade‐induced reduction in unemployment of a high‐wage economy

Richard Brecher and Zhihao Yu

The World Economy, 2023, vol. 46, issue 10, 2983-2989

Abstract: This paper shows that a high‐wage country might reduce its unemployment by trading with a low‐wage economy, despite popular predictions to the contrary. We demonstrate this possibility in a Heckscher–Ohlin–Samuelson type of model with two countries, which differ only because one of them has a binding minimum‐wage constraint and a technological improvement that (despite the heightened wage) creates a comparative advantage in the labour‐intensive good. Under these circumstances, the minimum‐wage economy will experience an unemployment reduction when it trades with a low‐wage counterpart. This theoretical result is consistent with some recent empirical estimates.

Date: 2023
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