Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism
AbstractUsing a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework and with contract-based wage rigidity, we show that permanent tariffs lead to a current account deterioration and a fall in employment, contradicting most of the literature on macroeconomic effects of import tariffs. The crucial factor in this complete reversal of standard results is the impact of tariffs on domestic real product wages via wage indexation. Temporary tariffs will have less of a negative impact on the CA or potentially even a positive impact, because they increase the consumption rate of interest (the terms at which future consumption can be traded for current consumption) and so increase private savings. Extensions towards incorporating a more general production structure, investment and the use of tariff revenues to provide wage subsidies are presented.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 30.
Date of creation: Oct 1984
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Other versions of this item:
- van Wijnbergen, Sweder, 1987. "Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 691-706, October.
- Sweder van Wijnbergen, 1987. "Tariffs, Employment and the Current Account: Real Wage Resistance and the Macroeconomics of Protectionism," NBER Working Papers 2261, National Bureau of Economic Research, Inc.
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