International Trade with Equilibrium Unemployment

International Trade with Equilibrium Unemployment

CARL DAVIDSON
STEVEN J. MATUSZ
Copyright Date: 2010
Pages: 432
https://www.jstor.org/stable/j.ctt7rsqm
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  • Book Info
    International Trade with Equilibrium Unemployment
    Book Description:

    While most standard economic models of international trade assume full employment, Carl Davidson and Steven Matusz have argued over the past two decades that this reliance on full-employment modeling is misleading and ill-equipped to tackle many important trade-related questions. This book brings together the authors' pioneering work in creating models that more accurately reflect the real-world connections between international trade and labor markets.

    The material collected here presents the theoretical and empirical foundations of equilibrium unemployment modeling, which the authors and their collaborators developed to give researchers and policymakers a more realistic picture of how international trade affects labor markets, and of how transnational differences in labor markets affect international trade. They address the shortcomings of standard models, describe the empirics that underlie equilibrium unemployment models, and illustrate how these new models can yield vital insights into the relationship between international trade and employment. This volume also includes an indispensable general introduction as well as concise section introductions that put the authors' work in context and reveal the thinking behind their ideas.

    Economists are only now realizing just how important these ideas are, making this book essential reading for researchers and students.

    eISBN: 978-1-4008-3216-3
    Subjects: Economics, Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. PREFACE
    (pp. ix-xiv)
    Carl Davidson and Steven J. Matusz
  4. ACKNOWLEDGMENTS
    (pp. xv-xx)
  5. Chapter 1 OUR MOTIVATION
    (pp. 1-24)

    In 1992 H. Ross Perot ran as an independent candidate for the presidency of the United States. Two of his major campaign issues were the size of the national debt and a promise to block the passage of the North America Free Trade Agreement (NAFTA) in response to fears that this would lead to large job losses for American workers. Perhaps the most well-known phrase from this campaign was tied to his prediction that the passage of NAFTA would result in a “giant sucking sound” as jobs headed south for Mexico where wages were significantly below those paid in the...

  6. PART 1: NEW INSIGHTS FROM “OLD” TRADE THEORY
    • Introduction to Part 1
      (pp. 27-32)

      We begin our book with two articles that focus on extending conventional general equilibrium models of international trade to allow for unemployment. Here, the term “conventional” is meant to refer to the Hechscher-Ohlin-Samuelson (HOS) and Ricardian models that dominated the field until quite recently. We have little to say in these papers about how trade affects the equilibrium rate of unemployment—in fact, when we have taken up this issue at all, it has always been in response to requests by editors and/or referees. As we noted in the introduction, this is because we view it as an empirical issue....

    • Chapter 2 THE STRUCTURE OF SIMPLE GENERAL EQUILIBRIUM MODELS WITH FRICTIONAL UNEMPLOYMENT
      (pp. 33-59)
      Carl Davidson, Lawrence Martin and Steven Matusz

      Because of its simple structure and intuitive appeal, the two-sector general equilibrium Walrasian model has served “as the workhorse for most of the developments in the pure theory of international trade” (Jones 1965, p. 557). This model has also been used extensively in most of the other applied fields of economics. In his seminal article “The Structure of Simple General Equilibrium Models,” Jones contributed to our understanding of this model by exposing its basic structure in a manner that allowed him to unify the many approaches that had been developed in different applied areas. In particular, he examined two key...

    • Chapter 3 TRADE AND SEARCH-GENERATED UNEMPLOYMENT
      (pp. 60-90)
      Carl Davidson, Lawrence Martin and Steven Matusz

      The vast majority of public debate concerning trade policy centers on the impact of trade on employment. Those opposed to free trade argue that lower production costs and fewer regulations in other countries allow foreign firms to outcompete domestic producers. This, they argue, results in less domestic output and fewer domestic jobs. On the other hand, proponents of free trade argue that free trade expands our export markets, resulting in a greater demand for our products, greater domestic production, and more jobs.

      The vast majority of economists view both of these arguments as misguided and fundamentally incorrect. In fact, the...

  7. PART 2: COMPLICATIONS
    • Introduction to Part 2
      (pp. 93-96)

      In part 1, we highlighted results that would hold in general equilibrium models of trade with search-generated unemployment when equilibrium is constrained Pareto efficient. In the articles in part 2 we take a different approach. Here, we emphasize the role that labor market externalities can play in open economies and explore some welfare complications that arise in dynamic models with unemployment.

      The article in chapter 4, which appeared in theJournal of International Economicsin 1991, demonstrates that in certain situations, labor market externalities can lead to problems when attempting to predict trade patterns. The basic result builds upon the...

    • Chapter 4 MULTIPLE FREE TRADE EQUILIBRIA IN MICRO MODELS OF UNEMPLOYMENT
      (pp. 97-109)
      Carl Davidson, Lawrence Martin and Steven Matusz

      Neoclassical trade theory predicts that the pattern of trade will be linked to autarkic differences in relative opportunity costs. These differences are often attributed to unequal factor endowments across countries, but may also result from variations in technologies, tastes, or other factors. However, if countries are identical and if autarkic equilibrium is unique, the pretrade opportunity costs will be the same in all countries, and there will be no basis for trade. The purpose of this paper is to demonstrate that when the standard, competitive, frictionless international trade model is extended to allow for unemployment, the simple link between relative...

    • Chapter 5 JOBS AND CHOCOLATE: SAMUELSONIAN SURPLUSES IN DYNAMIC MODELS OF UNEMPLOYMENT
      (pp. 110-137)
      Carl Davidson, Lawrence Martin and Steven Matusz

      Economics is rife with examples of important results that were derived in static models that may not hold in dynamic settings. One of the most celebrated examples of this phenomenon is Samuleson’s (1958) result that in an overlapping-generations framework competitive equilibria are not generally Pareto efficient. In its simplest form, the logic is as follows.¹ Suppose that we have an overlapping-generations economy with zero population growth and no discounting in which agents live for two periods. In each period of life, agents receive an endowment of one unit of nonstorable chocolate. For simplicity, assume that agents view consumption in the...

    • Chapter 6 LONG-RUN LUNACY, SHORT-RUN SANITY: A SIMPLE MODEL OF TRADE WITH LABOR MARKET TURNOVER
      (pp. 138-158)
      Carl Davidson and Steven J. Matusz

      The first quote from Paul Krugman represents the widespread view that most important international trade issues can best be understood by focusing on long-run relationships. Many of the assumptions that underlie the most influential model of trade—the Heckshcer-Ohlin-Samuelson (HOS) model—are clearly long-run in nature and it is understood that the model’s predictions are intended to describe long-run relationships. Over the years, there have been many attempts to broaden our scope and begin to take the short-run more seriously. The specific-factors (SF) model is one such example. It replaces the HOS assumption of complete factor mobility with another extreme...

  8. PART 3: EMPIRICS
    • Introduction to Part 3
      (pp. 161-164)

      Approximately fifteen years into our research agenda, we began to realize that we could reach a broader audience of nonspecialists if we could have more space than permitted in a single journal article and if we could be a bit more relaxed in our presentation. Thus, looking for a sponsor for a monograph that would pull together the core of our work modeling trade and employment, we approached the Upjohn Institute for Employment Research. Randy Eberts, the director of the institute, was quite interested, but the institute typically sponsored empirical work and Eberts was concerned that our proposed monograph had...

    • Chapter 7 TRADE AND TURNOVER: THEORY AND EVIDENCE
      (pp. 165-194)
      Carl Davidson and Steven J. Matusz

      A view that seems to be commonly held by a significant portion of the public is that international trade generates forces that threaten job security, particularly in the U.S. manufacturing sector. The basic idea is simple and intuitive—a sudden surge of imports in a sector intensifies competition, drives American firms out of business, and destroys American jobs. Of course, international trade could also have a positive effect on labor market outcomes—a sudden increase in the demand for American-made goods could lead to an increase in the number of jobs available as export sectors expand. In either case, changes...

    • Chapter 8 TRADE, TURNOVER, AND TITHING
      (pp. 195-220)
      Christopher S. P. Magee, Carl Davidson and Steven J. Matusz

      One of the main themes of international economics is that trade relationships have profound implications for the domestic distribution of income. While there is no question that a change in trade policy creates winners and losers, the identity of the winners and losers largely depends on the degree to which factors of production can move between sectors. The two polar extremes are embodied in the Heckscher-Ohlin-Samuelson (HOS) model, where factors are assumed to be perfectly mobile between sectors, and the Ricardo-Viner (RV) model (a.k.a. specific-factors model), where some factors of production are assumed to be completely immobile. One of the...

  9. PART 4: ADJUSTMENT COSTS AND POLICY ISSUES
    • Introduction to Part 4
      (pp. 223-226)

      Generally, those who discuss trade liberalization acknowledge that there will be winners and losers, and it may even be the case that the losses outweigh the gains in the short run. But it is a matter of faith that the long-run benefits of freer trade dominate any short-run losses, allowing those who win from trade reform to compensate those who lose. Despite abundant empirical evidence that displaced workers suffer significant personal costs, shockingly few attempts have been made to quantify or model the aggregate costs of adjusting to trade liberalization.¹

      As we argue in chapter 6, ignoring short-run adjustments can...

    • Chapter 9 SHOULD POLICY MAKERS BE CONCERNED ABOUT ADJUSTMENT COSTS?
      (pp. 227-264)
      Carl Davidson and Steven J. Matusz

      Even the most strident advocates of free trade would readily admit that it takes time for economies to reap the benefits from trade liberalization. As trade patterns change, some workers lose their jobs and must seek reemployment in expanding sectors. There may be some cases in which these workers need to retool in order to find new jobs. Of course, these workers do not produce any output while they search for reemployment and/or retrain. As a result, during the adjustment process, there may be a period during which welfare falls below its initial level. Policy makers often have a difficult...

    • Chapter 10 AN OVERLAPPING-GENERATIONS MODEL OF ESCAPE CLAUSE PROTECTION
      (pp. 265-291)
      Carl Davidson and Steven J. Matusz

      Between January 1974 and January 2002, the United States International Trade Commission (USITC) completed investigations of 73 petitions for import relief filed under the aegis of section 201 of the Trade Act of 1974 (Bishop 2002). This act permits interested parties to petition the USITC for relief from injurious but fair foreign competition. Any relief granted is intended as a temporary measure, providing the industry with time to adjust to changing circumstances.

      Of the 73 completed investigations, 40 resulted in affirmative findings by the commission. After forwarding their recommendations to the president of the United States, 24 of these cases...

    • Chapter 11 TRADE LIBERALIZATION AND COMPENSATION
      (pp. 292-320)
      Carl Davidson and Steven J. Matusz

      Two of the most generally accepted propositions in economics are that trade liberalization harms some groups but that it also generates aggregate net benefits. In fact, there are large literatures devoted to identifying the winners and losers from freer trade and measuring their gains and losses. Yet, there has been surprisingly little research aimed at investigating the best way to go about compensating those who lose. Using a traditional, full-employment model of trade Dixit and Norman (1980, 1986) have argued that it is possible to use commodity taxes to compensate the losers without exhausting the benefits from freer trade. This...

    • Chapter 12 CAN COMPENSATION SAVE FREE TRADE?
      (pp. 321-348)
      Carl Davidson, Steven J. Matusz and Douglas R. Nelson

      Welfare economics generally, and the welfare economics of international trade in particular, has long understood that there is a close connection between liberalization and the need for compensation. While liberalization generally implies gains, it also implies adjustment, and, loosely speaking, the bigger the gains, the bigger the adjustment. For a country unable to influence its terms of trade, we have a sizable number of results, under quite general conditions, showing that free trade dominates limited trade and, under more restricted conditions, that existing forms of protection could be liberalized in such a way as to produce an increase in aggregate...

  10. PART 5: NEW INSIGHTS FROM “NEW” TRADE THEORY
    • Introduction to Part 5
      (pp. 351-354)

      In part 1 of this book we focused on the implications of adding labor market imperfections to the conventional Hechscher-Ohlin-Samuelson and Ricardian models of international trade. In both of these frameworks, the unit of analysis is the industry, with all firms within an industry assumed to be identical. These two models were the primary workhorses for the field as late as the mid-1980s, when this began to change as researchers borrowed modeling techniques from industrial organization, macroeconomics, and other areas to build richer models of product market interaction between firms in open economies. The once standard assumption of perfect competition...

    • Chapter 13 GLOBALIZATION AND FIRM-LEVEL ADJUSTMENT WITH IMPERFECT LABOR MARKETS
      (pp. 355-387)
      Carl Davidson, Steven J. Matusz and Andrei Shevchenko

      Even within narrowly defined industries, firms that produce similar products often use technologies with different levels of sophistication, employ different occupational mixes of workers, and pay different wages. If one looks for patterns across firms, then recent findings suggest that firms that adopt more modern technologies tend to employ more highly skilled workers and pay higher wages than their counterparts (Doms, Dunne, and Troske 1997). The purpose of this paper is to show that by combining this insight with the fact that unemployed workers must search for jobs, we are able to develop a simple model of a product market...

    • Chapter 14 OUTSOURCING PETER TO PAY PAUL: HIGH-SKILL EXPECTATIONS AND LOW-SKILL WAGES WITH IMPERFECT LABOR MARKETS
      (pp. 388-406)
      Carl Davidson, Steven J. Matusz and Andrei Shevchenko

      Over the past few decades many American companies have faced growing economic incentives to move certain productive activities abroad. Technological advances, improvements in telecommunications, and trade deregulation have made it very attractive to move some stages of the production process to foreign countries where labor can be hired at relatively low cost. Over the past few years, new concerns have arisen as firms have begun to outsource services that were typically performed by relatively high-skilled workers in the United States. TheNew York Timesand other major publications have been filled with stories of computer companies staffing their call centers...

  11. INDEX
    (pp. 407-412)