Nations, Industries and Households
- The Cournot Centre series
Edited by Robert M. Solow and Jean-Philippe Touffut
Chapter 3: Labour Market Frictions as a Source of Comparative Advantage: Implications for Unemployment and Inequality
3. Labour market frictions as a source of comparative advantage: implications for unemployment and inequality1 Elhanan Helpman INTRODUCTION Until the 1980s, studies of international trade were dominated by two sources of comparative advantage: technological capabilities and factor endowments. The former approach, originally attributed to David Ricardo, starts from the observation that sectoral relative labour productivity varies across countries, and derives from this feature implications for the structure of foreign trade. The latter approach, originally attributed to Eli Heckscher and reformulated by Bertil Ohlin, starts from the observation that endowments vary across countries, and derives from this feature implications for the structure of trade, assuming that technologies are the same in every country. While the Ricardian approach abstracts from differences in the composition of factor endowments, the Heckscher– Ohlin approach abstracts from differences in technologies. These two approaches are complementary to each other, emphasizing alternative sources of comparative advantage. Both focus, however, on explaining the structure of trade at the sectoral level, that is, on predicting which country exports food, which exports electronic products, which exports chemical products, and so forth. As growth in world trade proceeded at a rapid pace after World War Two, and especially so in manufactures, it became apparent that this focus was not adequate, because much of world trade was taking place within industries. Namely, many countries both exported and imported food, exported and imported electronic products, and exported and imported chemical products. Moreover, it was recognized that an emphasis on differences across countries, either in...
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