Trade Liberalization and Unemployment

38 Pages Posted: 15 Feb 2006

See all articles by Pierre-Richard Agenor

Pierre-Richard Agenor

University of Manchester - School of Social Sciences

Date Written: February 1995

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.

JEL Classification: E24, F13, J42

Suggested Citation

Agenor, Pierre-Richard, Trade Liberalization and Unemployment (February 1995). IMF Working Paper, Vol. , pp. 1-34, 1995. Available at SSRN: https://ssrn.com/abstract=883170

Pierre-Richard Agenor (Contact Author)

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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