Models of Unemployment in Trade and Economic Development

Models of Unemployment in Trade and Economic Development

Models of Unemployment in Trade and Economic Development

Models of Unemployment in Trade and Economic Development

Synopsis

The impact of increased levels of international trade on domestic labour markets is a key issue for policy makers in both developed and less developed countries. This book considers the most important current issues in this area in the context of models which examine the relationship between trade and employment.
It is divided into three parts. The first deals with unemployment, decay and the 'Dutch Disease': the second with structural adjustment, urban unemployment and protectionism; the last offers some variations on models of unemployment. In parts one and two the important insights are that minimum wages may cause decay rather than growth and that disaggregation of non-traded goods between urban and rural regions is of critical importance in structural adjustment, protectionism and the real exchange rate. In part three, segmented labour market theory is used to explain urban and disguised unemployment and the importance of proper agricultural policies for rural development is emphasised. Finally the impact of technology transfers on employment in both donor and recipient countries is explored.

Excerpt

In the past decade, several papers have been written incorporating unemployment in models of trade and development. Some of this material has also been incorporated in textbooks on international trade and/or development economics. However, this is still an area about which very few full-length treatments have been published. The present work provides a rigorous treatment of unemployment in trade and development models. The treatment is not comprehensive. It is based mainly on research carried out by us over the last six years. The book is designed to provide a theme to the above work and make it available in a single volume to a large body of readers.

Throughout the book (with the exception of Chapter 7) it is assumed that the real minimum wage is always set exogenously above the competitive level so that it generates unemployment. In more general models of political economy the wage-fixing mechanism would be endogenous and the behaviour of trade unions would be part of the modelling process. It is not the purpose of the book to explain the behaviour of unions or, for that matter, the wage-fixing mechanism itself. The real wage is taken as given and its consequences for various trade and development models are examined.

Part I of the book consists of three chapters. Chapter 1 presents a treatment of a two-sector general equilibrium model of a closed economy with flexible prices. This model provides the main basis for most of the minimum wage models used in trade and development literature. In Chapter 2 a uniform real minimum wage is introduced and its consequences are examined for the production possibility curve and economic growth. The last chapter in this part of the book introduces a non-traded good. The extended model is then used to analyse Dutch-disease-type phenomena. The major theme of this part of the book is to show the breakdown of conclusions based on first best intuition. For example, it is established that too high a minimum

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