Models of Unemployment in Trade and Economic Development

Bharat Hazari, Pasquale Sgro

• Publisher: Routledge
• Year: 2005
• Print ISBN: 9780415022774
• eBook ISBN: 9781134975761
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The impact of increased levels of international trade on domestic labour markets is a key issue for policy makers in both developed and less developed countries. This book considers the most important current issues in this area in the context of models which examine the relationship between trade and employment.It is divided into three parts. The first deals with unemployment, decay and the `Dutch Disease': the second with structural adjustment, urban unemployment and protectionism; the last offers some variations on models of unemployment. In parts one and two the important insights are that minimum wages may cause decay rather than growth and that disaggregation of non-traded goods between urban and rural regions is of critical importance in structural adjustment, protectionism and the real exchange rate. In part three, segmented labour market theory is used to explain urban and disguised unemployment and the importance of proper agricultural policies for rural development is emphasised. Finally the impact of technology transfers on employment in both donor and recipient countries is explored.

Part I
Uniform real minimum
wage rates, unemployment,
decay and Dutch disease

This part of the book consists of three chapters. Chapter 1 presents a treatment of a two-sector general equilibrium model of a closed economy with flexible prices. The techniques and tools developed in this chapter are widely used in several real models of unemployment. Three important and well-known results are presented: the Rybczynski theorem, the Stolper-Samuelson theorem and the derivation of the production possibility curve.

Chapter 2 utilizes the tools developed in Chapter 1 to show the impact of imposing a real minimum wage on the shape of the production possibility curve and economic growth. The distorted production possibility curve is derived by using the Rybczynski and Stolper-Samuelson theorems. Two significant results are presented in this chapter. First, it is shown that a minimum wage constraint results in a distorted production possibility curve which leads to multiple production equilibria. Demand conditions then play an important role in determining a unique equilibrium point. Second, it is shown that an economy with too high a minimum wage rate may result in decay — an important implication for policy-making.

Chapter 3 introduces a non-traded good into the above setting. In this extended framework the phenomenon of Dutch disease is examined under the constraint that there exists a uniform real minimum wage rate. Dutch disease is concerned with examining the effects of a sectoral boom on the relative price of the non-traded goods (real appreciation of the exchange rate), sectoral outputs and factor incomes. It is shown that Dutch disease-type results are only valid in simple models and do not carry over to more general models.

1 A two-sector model
of a closed economy

INTRODUCTION

This chapter provides a simple and systematic treatment of a two-commodity, two-factor general equilibrium model of a closed economy which is widely used in several real models of unemployment.¹ This should be contrasted with models of unemployment that are aggregate in nature and also include money.² Of course, it is not being asserted that the aggregate models necessarily require the use of money for generating unemployment. The basic point to emphasize is that real and monetary models should be clearly distinguished from each other. Notable examples of two-sector real models with unemployment are models of trade and unemployment as expounded by Batra and Seth (1977), Brecher (1974), Bhagwati (1983) and Haberler (1950), the Harris-Todaro (1970) model of urban unemployment and, more recently, the Hazari-Sgro (1987) model of urban and disguised unemployment with Nash bargaining. This chapter provides a framework for discussing various two-sector models of unemployment.

A TWO-SECTOR MODEL OF A CLOSED ECONOMY

Consider an economy that produces two commodities, X₁ and X₂. The aggregate utility function for the country as a whole is given by:

where U indicates total utility and D_i (i = 1,...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Contents
• Dedication
• Acknowledgements
• Foreword
• Part I Uniform real minimum wage rates, unemployment, decay and Dutch disease
• Part II Generalized Harris-Todaro model, structural adjustment and unemployment
• Part III Further variations on models of unemployment
• Index