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 8: International Trade and Wage Inequality: The Role of Economies of Scale and Relative Factor Endowments

Hian Teck Hoon

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


INTRODUCTION 8.1 Although the issue of wage inequality has held centre stage in policy discussions in recent years, it is arguable that it is not the inequality per se that is the major problem. In any market economy, a certain amount of wage inequality necessarily exists, which corresponds to an equilibrium wage premium that a skilled worker can earn over an unskilled worker, thus providing the needed incentive for the latter to acquire skills. Instead, it is the fact that rising wage inequality has been accompanied by absolute declines in real earnings of workers at the low end of the wage distribution that is a matter for serious policy concern. This is the view expressed, for example, by Feldstein (1998) who sees poverty among workers in the bottom decile or quintile as the real problem. Whether the rise in wage dispersion corresponds to an absolute decline in real earnings or real gains for the bottom decile has, indeed, important social implications. For example, Freeman (1994) has linked the high rate of crime in the United States despite massive incarceration to the rise in earnings inequality accompanied by a fall in the real earnings of the less skilled. The fall in real earnings from work relative to the returns to crime such as from dealing in illegal drug business served to provide a job market push into crime. Phelps (1997) has also made a strong argument that the decline in net wages relative to median pay makes it impossible for lowskilled...

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