Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism

Sweder van Wijnbergen

No 30, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Using a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework and with contract-based wage rigidity, we show that permanent tariffs lead to a current account deterioration and a fall in employment, contradicting most of the literature on macroeconomic effects of import tariffs. The crucial factor in this complete reversal of standard results is the impact of tariffs on domestic real product wages via wage indexation. Temporary tariffs will have less of a negative impact on the CA or potentially even a positive impact, because they increase the consumption rate of interest (the terms at which future consumption can be traded for current consumption) and so increase private savings. Extensions towards incorporating a more general production structure, investment and the use of tariff revenues to provide wage subsidies are presented.

Keywords: Balance of Payments; Employment; Tariffs; Wage Indexation (search for similar items in EconPapers)
Date: 1984-10
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Related works:
Journal Article: Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism (1987)
Working Paper: Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism (1987)
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