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Trade-Induced Reduction In Unemployment Of A High-Wage Economy: A Minimum-Wage Model With Country-Specific Technology

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Abstract

This paper shows that a high-wage country might reduce its unemployment by trading with a low-wage economy, despite popular predictions to the contrary. We demonstrate this possibility in a Heckscher-Ohlin-Samuelson type of model with two countries, which differ only because one of them has a binding minimum-wage constraint and a technological improvement that (despite the heightened wage) creates a comparative advantage in the labor-intensive good. Under these circumstances, the minimum-wage economy will experience an unemployment reduction when it trades with a low-wage counterpart. This theoretical result is consistent with some recent empirical estimates.

Suggested Citation

  • Richard A. Brecher & Zhihao Yu, 2021. "Trade-Induced Reduction In Unemployment Of A High-Wage Economy: A Minimum-Wage Model With Country-Specific Technology," Carleton Economic Papers 21-04, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:21-04
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    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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