Abstract
The main interest focus of this paper is the relation between international trade and the labour market, with an emphasis on the unemployment rate, and the allocation of workers among sectors. A general trade equilibrium model with three sectors is constructed for a less developed country. An informal and un-tradable sector is characterised by flexible wages, while the other two sectors are tradable, export and import sectors. The model imposes a binding minimum wage on unskilled labour and wage distortions on skilled labour. Comparative statics are used to analyse the effects on the labour market of an open economy, a rise in the minimum wage and a positive productivity shock in the export sector.
Highlights
Open economic policy in less developed countries (LDC) leads to consideration of the main effects on the labour market, a relevant analysis because of labour’s impact on economic efficiency and social welfare
This study’s main findings are as follows: 1) Free trade policies in a small open LDC could explain some unemployment levels if the market frictions and institutional restrictions are considered; 2) the unemployment effects might be offset if the trade liberalisation improves both the efficient allocation of resources in the economy and productivity in the export sector; 3) improved export performance in the economy might increase the un-tradable sector and decrease the unemployment rate; so that more productive firms are bigger, earn higher profits and demand more workers; and 4) the positive effects on employment from the growing export sector will be reduced if the minimum wage is raised
The model in this paper analytically links the main labour market issues that empirical research has observed for LDCs
Summary
Open economic policy in less developed countries (LDC) leads to consideration of the main effects on the labour market, a relevant analysis because of labour’s impact on economic efficiency and social welfare. This study’s main findings are as follows: 1) Free trade policies in a small open LDC could explain some unemployment levels if the market frictions and institutional restrictions are considered; 2) the unemployment effects might be offset if the trade liberalisation improves both the efficient allocation of resources in the economy and productivity in the export sector; 3) improved export performance in the economy might increase the un-tradable sector and decrease the unemployment rate; so that more productive firms are bigger, earn higher profits and demand more workers; and 4) the positive effects on employment from the growing export sector will be reduced if the minimum wage is raised.
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