Unemployment effects of trade with a low‐wage country: A minimum‐wage model with sector‐specific factors

Richard Brecher and Zhihao Yu ()

Review of International Economics, 2021, vol. 29, issue 2, 402-408

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.

Date: 2021
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https://doi.org/10.1111/roie.12530

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Working Paper: Unemployment Effects of Trade with a Low-Wage Country: A Minimum-Wage Model with Sector-Specific Factors (2020)
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