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The Balassa-Samuelson model with job separations

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  • Gaston, Noel
  • Yoshimi, Taiyo

Abstract

We incorporate sectoral job separation rates in a small open economy model to examine the Balassa-Samuelson (B-S) effect. Unequal separation rates give rise to compensating wage differentials. We simulate the model for Japan and replicate a feature of its economy that the nontradeables sector has higher wages and a higher separation rate compared to the tradeables sector. With productivity growth in the tradeables sector, labour moves from the tradeables sector to the nontradeables sector if tradeables and nontradeables are complements in consumption. The B-S effect is dampened. With a higher separation rate in the nontradeables sector, higher wages in the nontradeables sector amplifies this labour movement. Nevertheless, unemployment always falls due to a positive income effect. In contrast, the effect of productivity growth in the nontradeables sector is to lower the real exchange rate and raise unemployment.

Suggested Citation

  • Gaston, Noel & Yoshimi, Taiyo, 2023. "The Balassa-Samuelson model with job separations," Japan and the World Economy, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:japwor:v:65:y:2023:i:c:s0922142522000573
    DOI: 10.1016/j.japwor.2022.101172
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    More about this item

    Keywords

    Balassa-Samuelson; Unemployment; Compensating wage differential; Job matching;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor

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