Imperfect Labor Mobility and the Trickle-Down Effect in International Trade

21 Pages Posted: 30 Oct 2017 Last revised: 17 Dec 2017

See all articles by Sungwan Hong

Sungwan Hong

Department of Economics, Pennsylvania State University

Soo Hyun (Catherine) Oh

Korea Institute for International Economic Policy

Seung-Gyu Sim

Aoyama Gakuin University

Date Written: November 30, 2017

Abstract

Purpose – Unlike the common belief in the so-called ‘trickle-down effect,’ trade-induced output growth in a small open economy does not necessarily improve the domestic welfare of the economy. This paper analyzes the conditions under which the trickle-down effect does not work properly such that the connection between trade-induced output growth and welfare improvement is broken.

Design/methodology/approach – This paper introduces an inter-sectoral migration barrier in the general equilibrium model and conducts various simulation experiments under reasonable parameter values.

Findings – This paper demonstrates that subsidizing export industries may raise the total value-added of an economy but deteriorate aggregate welfare. This worsens especially when the supply of non-tradable domestic goods is labor intensive and inelastic, and the demand for them is more substitutable by tradable goods.

Practical implications – To reinforce the trickle-down effect, it is necessary to facilitate efficient labor reallocation and to induce capitalization in the non-tradable sector.

Originality/value – That output growth and welfare improvement do not always move in the same direction requires a reappraisal of the trickle-down effect which emphasizes output growth as an indicator of welfare improvement.

Keywords: Imperfect labor mobility, Trickle-down effect, Export subsidy, International Trade

JEL Classification: F13, F16, F41, F62

Suggested Citation

Hong, Sungwan and Oh, Soo Hyun (Catherine) and Sim, Seung-Gyu, Imperfect Labor Mobility and the Trickle-Down Effect in International Trade (November 30, 2017). Available at SSRN: https://ssrn.com/abstract=3031701 or http://dx.doi.org/10.2139/ssrn.3031701

Sungwan Hong

Department of Economics, Pennsylvania State University ( email )

University Park, PA 16802
United States

Soo Hyun (Catherine) Oh (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Seung-Gyu Sim

Aoyama Gakuin University ( email )

4-4-25 Shibuya, Shibuya-ku
Tokyo, 150-8366
Japan

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