Trade‐induced reduction in unemployment of a high‐wage economy

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 labour‐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.