Tariffs, Employment and the Current Account : The Role of Real Wage Resistance
AbstractUsing a standard complete specialization model of a small open economy within a rigorous intertemporal optimization framework 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 macro-economic 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 University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 248.
Length: 26 pages
Date of creation: 1984
Date of revision:
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