Trade, Jobs and Wages

Trade, Jobs and Wages

Hian Teck Hoon

The world’s increasing integration through trade and the persistence of high unemployment in Europe, and other areas of the world, highlight the need to understand the implications of free trade for unemployment. Trade, Jobs and Wages analyses how employment levels and real wages are affected by international trade. Popular trade theory disregards the impact of free trade on the rate of unemployment, since it assumes full employment at the outset. By focusing on the determinants of the natural rate of unemployment, Professor Hoon places an emphasis on real, as opposed to monetary, factors in accounting for long term trends in wages and unemployment.

Chapter 5: International Product–Market Competition, Jobs and Wages

Hian Teck Hoon

Subjects: business and management, international business, economics and finance, international economics, labour economics

Extract

INTRODUCTION 5.1 Is trade good for jobs?1 Surprisingly, this is not a question that the bulk of trade theory is well poised to answer. The reason, as we have argued, is that conventional trade models – whether of the perfectly competitive or imperfectly competitive type – assume at the outset that full employment prevails. More accurately, the economy is assumed to be at the natural rate of unemployment – one that is treated for practical purposes as a constant and invariant to the international economic environment as well as economic policy. Yet this assumption of an exogenously determined equilibrium rate of unemployment seems at odds with the persistent rise of unemployment in many of the OECD countries in the past two and a half decades, especially in Western Europe, and the steady decline of unemployment in East Asia over the past quarter-century. The persistent increase in the average jobless rate in the medium to long run has prompted various economists to develop theories of the endogenous movements of the equilibrium rate of unemployment. Layard, Nickell and Jackman (1991) develop a bargaining framework to explain the factors determining the natural rate of unemployment in Western Europe while Lindbeck and Snower (1988) develop an insider–outsider approach to the determination of the equilibrium unemployment rate. In Hoon and Phelps (1992), we apply an efficiency-wage story of labour turnover to provide a macroeconomic account of the shocks that can impinge on the natural rate. In broad terms, the view that has emerged is one...

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