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 11: A Synthesis

Hian Teck Hoon


This book has been motivated by a desire to build a theory which is generalequilibrium in its approach but yet allows one to study how the economic forces that operate in the global economy affect a nation’s long-term unemployment and wage performance. In undertaking this enterprise, the book makes a departure from the conventional treatment of unemployment in the international economics literature. By focusing on the determinants of the natural rate of unemployment, the theory places an emphasis on real (as opposed to monetary) factors in accounting for long-run movements in wages and unemployment. The theory is micro-foundation based, being built up from optimisation problems solved by decision-making workers and firms. The crucial new element that is introduced to standard fullemployment trade models is the informational asymmetric problem arising from the difficulty that firms have in monitoring the effort levels of workers. In the absence of bonding solutions, due, say, to capital–market imperfections, firms use wages as an incentive device. In general equilibrium, endogenous job rationing arises. The incentive-compatible wage generally rises as the equilibrium rate of unemployment declines giving, in effect, an upwardsloping wage curve in the employment rate–real wage plane. A demand– wage relation can be juxtaposed against the wage curve to determine the natural rate of unemployment, whose position in the Marshallian employment–wage diagram depends on the details of the production conditions and market structure. What are the principal lessons that have been derived from the analysis conducted in this...

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