International Trade Policy in a Model of Unemployment and Wage Differentials

Steven Matusz

Canadian Journal of Economics, 1994, vol. 27, issue 4, 939-49

Abstract: The author examines the effects of import tariffs and export subsidies in a two-sector model with sector-specific wage differentials and an equilibrium level of unemployment. In general, such policies change both the composition and level of employment. Policies designed to attract workers to the high-wage sector could also result in reduced employment and lower social welfare. This could happen if the low-wage sector is also the relatively labor-intensive sector. In such situations, the optimal policy might entail protecting the low-wage, labor-intensive sector. I examine the effects of import tariffs and export subsidies in a two-sector model with sector-specific wage differentials and an equilibrium level of unemployment. In general, such policies change both the composition and level of employment. Policies designed to attract workers to the high-wage sector could also result in reduced employment and lower social welfare. This could happen if the low-wage sector is also the relatively labour-intensive sector. In such situations the optimal policy might entail protecting the low-wage labour-intensive sector.

Date: 1994
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