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 9: Wealth, Labour Force Participation and Trade

Hian Teck Hoon

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


INTRODUCTION Although the unemployment rate is often used as an indicator of labourmarket conditions, it is sometimes argued that the amount of nonemployment may actually provide more information about the state of the labour market. Non-employment or non-participation would include potential workers who choose not to seek employment and would, in official labour statistics, be counted as ‘out of the labour force’. Declining labour-market opportunities that are reflected in declining take-home wages relative to workers’ non-wage incomes would lead workers to choose not to work, or at least not to work all the time. Conversely, improving labour market conditions reflected in rising wages relative to workers’ nonwage incomes would lead individuals who were formerly out of the labour force to rejoin the labour market. In this chapter, we use a neoclassical growth model to study how changes in workers’ current and future wage earnings relative to their non-wage incomes affect their labour supply decisions. Here, all variation in employment takes the form of adjustment in equilibrium man-hours supplied. However, following Woodford (1994), the adjustment of equilibrium man-hours supplied could be interpreted as occurring at the extensive margin if we think of the representative agent as belonging to a large group, which pools together its resources and decides jointly on consumption and employment supply. Under the latter interpretation, the variation in total employment reflects individuals’ decisions to participate in or withdraw from the labour force. The model we develop in this chapter incorporates individual labour supply...

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