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Tariffs, Unemployment, and the Current Account: An Intertemporal Equilibrium Model

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  • Shi, Shouyong

Abstract

This paper integrates labor market search into an intertemporal equilibrium model to analyze the dynamic macroeconomic effects of a tariff. The model captures the intuitive argument in the earlier literature that a permanent increase in the tariff improves the country's terms of trade, which tends to reduce the product wage and stimulates labor demand. However, the tariff also increases the price of the consumption goods bundle and reduces the marginal utility of wealth measured by imports. This consumption bundle effect raises the reservation wage and the product wage. When the consumption smoothing motive is realistically strong, the consumption bundle effect dominates the product wage effect and so tariffs reduce employment in both the short run and the long run.
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Suggested Citation

  • Shi, Shouyong, 1997. "Tariffs, Unemployment, and the Current Account: An Intertemporal Equilibrium Model," Queen's Economics Department Working Papers 273401, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273401
    DOI: 10.22004/ag.econ.273401
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    Cited by:

    1. is not listed on IDEAS
    2. repec:hal:cepnwp:halshs-01895223 is not listed on IDEAS
    3. Antonia Lòpez-Villavicencio & Luis Antonio Reyes Ortiz, 2018. "Is globalisation taking away jobs? An empirical assessment for advanced economies," Working Papers halshs-01895223, HAL.

    More about this item

    Keywords

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    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F30 - International Economics - - International Finance - - - General

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