Trade, Jobs and Wages
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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.
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Chapter 10: Trade, Growth and Unemployment in Ricardo’s Essay on Profits Model

Hian Teck Hoon


10. Trade, growth and unemployment in Ricardo’s Essay on Profits model INTRODUCTION 10.1 A major theme of this book has been that international trade enlarges market size and through this channel has salutary effects on real wages and jobs. In this chapter, we return to a classical model of trade, growth and unemployment and show how market size interacts with the Stolper– Samuelson effect to influence jobs and wages. It draws upon recent formalisations of Ricardo’s ([1815] 1923) Essay model. Although the formalisation of Ricardo’s theory of trade based principally on Chapter 7 of his Principles ([1817] 1911) is static, various authors such as Burgstaller (1986), Findlay (1974) and Maneschi (1983) have developed a dynamic trade model based upon Ricardo’s ([1815] 1923) Essay on Profits. In the Essay model, the subsistence wage is treated as a parameter. If, following Leibenstein (1957), we treat the subsistence wage as a biologically determined wage that the workers require to be able to work, and we treat the labour force as a constant, we obtain a model that links trade and growth to employment expansion. Mokyr (1991, p. 189), looking at the Industrial Revolution, has suggested: In the final analysis, then, cheap labor could have been detrimental to industrialization through a variety of mechanisms. It could and probably did mean in some places that workers were underfed and possibly handicapped in other ways. Cheap labor could mean unmotivated, quarrelsome workers, poorly adapted to the discipline and rigor of factory...

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