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Trade Liberalization and Unemployment


  • Pierre-Richard Agénor
  • Joshua Aizenman


This paper examines the effect of trade reform on wages and unemployment in a two-sector, three-good economy in which labor is imperfectly mobile across sectors. Wages in the export sector are set so as to minimize turnover costs. The analysis shows that a reduction in tariffs, coupled with an adjustment in lump-sum taxes to equilibrate the government budget, lowers wages in all production sectors in the short and the medium run but has an ambiguous effect on unemployment. Although employment and production of exportables expand in the medium run, the unemployment rate may rise or fall depending on whether the elasticity of wages in the export sector with respect to wages in the nontraded goods sector is lower or greater than unity. Potentially adverse effects may be mitigated in the long run, however, as a result of induced shifts in the structure of production activities.

Suggested Citation

  • Pierre-Richard Agénor & Joshua Aizenman, 1995. "Trade Liberalization and Unemployment," IMF Working Papers 95/20, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:95/20

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    References listed on IDEAS

    1. Calvo, Guillermo A. & Drazen, Allan, 1998. "Uncertain Duration Of Reform," Macroeconomic Dynamics, Cambridge University Press, vol. 2(04), pages 443-455, December.
    2. Robert E. Baldwin, 1989. "Measuring Nontariff Trade Policies," NBER Working Papers 2978, National Bureau of Economic Research, Inc.
    3. Andriamananjara, Shuby & Nash, John, 1997. "Have trade policy reforms led to greater openness in developing countries : evidence from readily available trade data," Policy Research Working Paper Series 1730, The World Bank.
    4. Khan, Mohsin S. & Ostry, Jonathan D., 1992. "Response of the equilibrium real exchange rate to real disturbances in developing countries," World Development, Elsevier, vol. 20(9), pages 1325-1334, September.
    5. Guillermo A. Calvo & Allan Drazen, 1997. "Uncertain Duration of Reform: Dynamic Implications," NBER Working Papers 5925, National Bureau of Economic Research, Inc.
    6. Gerwin Bell & M. Zühtü Yücelik & Paul J Duran & Saleh M. Nsouli & Sena Eken, 1993. "The Path to Convertibility and Growth; The Tunisian Experience," IMF Occasional Papers 109, International Monetary Fund.
    7. Edward E. Leamer, 1988. "Measures of Openness," NBER Chapters,in: Trade Policy Issues and Empirical Analysis, pages 145-204 National Bureau of Economic Research, Inc.
    8. Dani Rodrik, 1992. "The Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 87-105, Winter.
    9. Willett:, Thomas D., 1986. "Exchange-rate volatility, international trade, and resource allocation: A perspective on recent research," Journal of International Money and Finance, Elsevier, vol. 5(1, Supple), pages 101-112, March.
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    Cited by:

    1. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, vol. 93(1), pages 17-30.
    2. Eddy Lee, 2005. "Trade Liberalization and Employment," Working Papers 5, United Nations, Department of Economics and Social Affairs.


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