Adjustment of wages and equilibrium unemployment in a Ricardian global economy

Abstract

This paper develops a dynamic Ricardian model of the world economy exhibiting endogenous wages and equilibrium unemployment. It is shown that international trade serves to give workers an increased stake in job-holding, and, in general equilibrium, leads to higher real earnings and lower equilibrium unemployment. Economic shocks emanating in one country affect the trading partner's equilibrium unemployment rate by shifting the terms of trade. The generality of the results are discussed along three dimensions: Replacing efficiency wages with bargaining in labor market; introducing role for market sizes and factor proportion differences; and introducing firm-specific training to generate dynamics. © 2001 Elsevier Science B.V. All rights reserved.