Equilibrium unemployment in a small open economy with a frictionless nontradeables sector

Erik Wengström ()
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Erik Wengström: University of Copenhagen

Economics Bulletin, 2008, vol. 10, issue 12, 1-9

Abstract: This paper analyzes the impact of international trade on the equilibrium rate of unemployment and economic welfare in a three-sector small open economy. While tradeables sectors have search-theoretic unemployment, the labor market of the nontradeables sector has no matching friction, which leads to Harris-Todaro (1970) type labor movements across the sectors. Under free trade, one of the tradeables sectors shrinks because of import competition, which forces workers in the sector to seek jobs in the other tradeables sector or in the nontradeables sector. If the home country has a comparative advantage in the capital-intensive tradeables, trade liberalization improves national welfare but raises the unemployment rate and ex-post wage inequality.

JEL-codes: F4 J6 (search for similar items in EconPapers)
Date: 2008-11-02
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