Theory and Methods Research Paper No. 2006/12
28 Pages Posted: 19 May 2006
This paper analyses trade in an asymmetric 2x2x2 world, where the two countries ("Europe" and "America") differ in their preferences towards wage inequality. Fair wage considerations compress wage differentials in both countries, leading to involuntary unemployment of unskilled workers in equilibrium. European workers are more averse to wage inequality, and Europe is characterised by lower wage differentials as well as higher unemployment. Allowing for endogenous skill formation in both countries, the effects of a globalisation shock - modelled as the entry of newly industrializing countries into the trading world - and a global technology shock on skill premia and employment levels are derived. In contrast to a model with exogenous factor supplies, global shocks have an effect on international wage and unemployment differentials.
Keywords: Globalisation, Unemployment, Fair Wages, Human Capital
JEL Classification: F11, F15, F16
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