Market Size, Comparative Advantage and the Natural Rate of Unemployment
We apply the Phelps-Stiglitz-Salop natural rate of unemployment model to study the impact of free trade on equilibrium unemployment. We identify two effects (with implications for equilibrium unemployment) that are at work when an economy opens up to trade: a scale effect; and a relative price effect. The enlargement of markets through trade expands the economy-wide demand for workers in certain jobs involving firm-specific training while relative price changes may either expand or contract the economy-wide demand for such workers. Juxtaposed against a pseudo-labour supply locus, the new equilibrium unemployment rate is determined.
Journal of International Trade and Economic Development
Taylor and Francis
HOON, Hian Teck.
Market Size, Comparative Advantage and the Natural Rate of Unemployment. (1996). Journal of International Trade and Economic Development. 5, (1), 79-98. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/419