Market Size, Comparative Advantage and the Natural Rate of Unemployment

We apply the Phelps-Stiglitz-Salop natural rate of unemployment model to study the impact of free trade on equilibrium unemployment. We identify two effects (with implications for equilibrium unemployment) that are at work when an economy opens up to trade: a scale effect; and a relative price effec...

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Bibliographic Details
Main Author: HOON, Hian Teck
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 1996
Subjects:
Online Access:https://ink.library.smu.edu.sg/soe_research/419
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Institution: Singapore Management University
Language: English
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Summary:We apply the Phelps-Stiglitz-Salop natural rate of unemployment model to study the impact of free trade on equilibrium unemployment. We identify two effects (with implications for equilibrium unemployment) that are at work when an economy opens up to trade: a scale effect; and a relative price effect. The enlargement of markets through trade expands the economy-wide demand for workers in certain jobs involving firm-specific training while relative price changes may either expand or contract the economy-wide demand for such workers. Juxtaposed against a pseudo-labour supply locus, the new equilibrium unemployment rate is determined.