Trade Liberalization and Unemployment

Pierre-Richard Agénor and Joshua Aizenman

No 1995/020, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the effect of trade reform on wages and unemployment in a two-sector, three-good economy in which labor is imperfectly mobile across sectors. Wages in the export sector are set so as to minimize turnover costs. The analysis shows that a reduction in tariffs, coupled with an adjustment in lump-sum taxes to equilibrate the government budget, lowers wages in all production sectors in the short and the medium run but has an ambiguous effect on unemployment. Although employment and production of exportables expand in the medium run, the unemployment rate may rise or fall depending on whether the elasticity of wages in the export sector with respect to wages in the nontraded goods sector is lower or greater than unity. Potentially adverse effects may be mitigated in the long run, however, as a result of induced shifts in the structure of production activities.

Keywords: WP; efficiency wage; labor market; market-clearing wage; wage ratio; efficiency consideration; goods sector; product wage; wage elasticity; Exports; Wages; Employment; Tariffs; Labor force; Global (search for similar items in EconPapers)
Pages: 38
Date: 1995-02-01
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Citations: View citations in EconPapers (2)

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