The Minimum Wage Economy, Variable Returns to Scale and Welfare

Abstract

Ever since the pioneering articles by Batra [1968], Jones [1968], Kemp and Neg ishi [1970] and Her berg and Kemp [1969], several trade theorists have analyzed the welfare implications of international trade in the presence of variable returns to scale. The contributions by Eaton and Panagariya [1979], Panagariya [1980, 1981], Choi and Yu [1984a, 1984b, 1985] explore some positive as well as normative aspects ot trade theo ry under variable returns to scale. By comparison, absolutely no attempt has been made to analyze the welfare effects of trade intervention in the presence of generalized unemployment and variable returns to scale. In one sence, the problem, being con sidered here is important because the majority of trading countries, developed as well as developing economies, have suffered from chronic unemployment throughout this century. In a seminal article Brecher [1974a, 1974b] imposed a minimum real wage rate in the economy and analyzed some trade proposition in the presence of generalized un employment. However, Brecher's model has the properties of the single factor Ric ardian model of trade and leads a trading country to complete specialization. In order to avoid complete specialization and production indeterminancy, a two-sector, three factor general equilibrium framework is set up to analyze the welfare implications of some pro tection measures by allowing the presence of variable returns to scale (henceforth VRS ) and unemployment.1 In the next section, the model is presented. Section HI deals with transformation curve and unemployment under VRS. In section IV, terms of trade and welfare as well