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Equilibrium unemployment in a small open economy with a frictionless nontradeables sector


  • Erik Wengström

    () (University of Copenhagen)


This paper analyzes the impact of international trade on the equilibrium rate of unemployment and economic welfare in a three-sector small open economy. While tradeables sectors have search-theoretic unemployment, the labor market of the nontradeables sector has no matching friction, which leads to Harris-Todaro (1970) type labor movements across the sectors. Under free trade, one of the tradeables sectors shrinks because of import competition, which forces workers in the sector to seek jobs in the other tradeables sector or in the nontradeables sector. If the home country has a comparative advantage in the capital-intensive tradeables, trade liberalization improves national welfare but raises the unemployment rate and ex-post wage inequality.

Suggested Citation

  • Erik Wengström, 2008. "Equilibrium unemployment in a small open economy with a frictionless nontradeables sector," Economics Bulletin, AccessEcon, vol. 10(12), pages 1-9.
  • Handle: RePEc:ebl:ecbull:eb-08j60007

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    References listed on IDEAS

    1. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    3. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 47-104, April.
    4. Burkhard Heer, 2006. "Should Unemployment Benefits Be Related to Previous Earnings?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(4), pages 530-550, December.
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    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance


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