Skip to main content
SpringerLink
Log in

Trade, Unemployment and Inequality in Product Variety Models—An Analytical Survey

  • Chapter
  • First Online:
Studies in International Economics and Finance

Part of the book series: India Studies in Business and Economics ((ISBE))

Abstract

There have been a significant body of theoretical and empirical work done on the effects of trade on employment and wage inequality. However, a close study of the extant literature shows that most of the work has been done within the aegis of factor-biased and sector-biased effects of factor returns due to trade. Specific factor market characteristics of the countries and their interaction owing to their trade linkages have not been explicitly studied especially in a trade model with product variety. In this work, apart from extensively discussing the literature on each of these aspects, we trace out briefly the impact of trade, entrepreneurial finance and presence of a fixed minimum wage policy on wage inequality in a one-sector Krugman-type model.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 139.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 179.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 179.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    Openness of trade helps international knowledge spillovers, which in turn raises the relative demand for skilled labour and pushes up wage inequality in developing countries. New technologies obtained using skilled workers diffuse to the less-skilled workers to some extent resulting in an increase in the demand for less-skilled labour. The net effect of these two kinds of knowledge spillovers on the equilibrium wage inequality in the developing country is the skill discrepancy effect.

  2. 2.

    In a relatively unskilled-labour abundant country, openness of trade can lead to a decrease in wage premium. This is called price effect.

  3. 3.

    The other way is to consider efficiency wage unemployment as in Matusz (1996).

References

  • Acemoglu, D. (1999). Changes in unemployment and wage inequality: An alternative theory and some evidence. American Economic Review, 89, 1258–1278.

    Article  Google Scholar 

  • Acemoglu, D. (2002). Directed technical change. Review of Economic Studies, 69, 781–810.

    Article  Google Scholar 

  • Addison, J., McKinley, T., Blackburn, L., & Cotti, C. D. (2009). Do minimum wages raise employment? Evidence from the U.S. retail‐trade sector. Labour Economics, 16(4), 397–408.

    Google Scholar 

  • Ahn, T., & Arcidiacono, P. (2004). Minimum wages and positive employment effects in general equilibrium. Duke University.

    Google Scholar 

  • Anwar, S. (2006a). Factor mobility and wage inequality in the presence of specialisation-based external economics. Economics Letters, 93(1), 88–93.

    Article  Google Scholar 

  • Anwar, S. (2006b). Provision of public infrastructure, foreign investment and welfare in the presence of specialisation-based external economies. Economic Modelling, 23, 142–156.

    Article  Google Scholar 

  • Anwar, S. (2009). Wage inequality, welfare and downsizing. Economics Letters, 103, 75–77.

    Article  Google Scholar 

  • Bai, X., Chatterjee, A., Krishna, K., & Ma, H. (2018). Trade and minimum wages in general equilibrium: Theory and evidence. NBER Working Paper No. 24456. National Bureau of Economic Research.

    Google Scholar 

  • Banga, R. (2005). Liberalisation and wage inequality in India. ICRIER Working Paper 156, March, ICRIER.

    Google Scholar 

  • Bastos, P., & Straume, O. R. (2010). Globalization, product differentiation and wage inequality. University of Nottingham Research Paper No. 2010/03.

    Google Scholar 

  • Behrman, J., Birdsall, N., & Szekely, M. (2000). Economic reform and wage differentials in Latin America. BID Working Paper 435, October, Inter-American Development Bank.

    Google Scholar 

  • Beladi, H., & Marjit, S. (1996). An analysis of rural-urban migration and protection. Canadian Journal of Economics, 29(4), 930–940.

    Article  Google Scholar 

  • Beladi, H., Chaudhuri, S., & Yabuuchi. S. (2008). Can international factor mobility reduce wage inequality in a dual economy? Review of International Economics, 16(5), 893–903

    Google Scholar 

  • Beyer, H., Rojas, P., & Vergara, R. (1999). Trade liberalization and wage inequality. Journal of Development Economics, 59, 103–123.

    Article  Google Scholar 

  • Borjas, G., & Ramey, V. (1993). Foreign competition, market power and wage inequality: Theory and evidence. NBER Working Paper 4556, December, Cambridge, MA.

    Google Scholar 

  • Bound, J., & Johnson, G. (1992). Changes in the structure of wages in the 1980s: An evaluation of alternative explanations. American Economic Review, 82, 371–392.

    Google Scholar 

  • Brecher, R. A., & Gross, T. (2018). A minimum wage model of unemployment and growth: The case of a backward-bending demand curve for labor. International Journal of Economic Theory, 15(3), 297–309.

    Article  Google Scholar 

  • Card, D., & Krueger, A. B. (1993). Minimum wages and employment: A case study of the New Jersey and Pennsylvania fast food industries. American Economic Review, 84(4), 772–793.

    Google Scholar 

  • Cengiz, D., Dube, A., Lindner, A., & Zipperer, B. (2019). The effect of minimum wages on low‐wage jobs: Evidence from the United States using a bunching estimator. NBER Working Paper No. 25434. National Bureau of Economic Research.

    Google Scholar 

  • Chaudhuri, S., & Yabuuchi, S. (2007). Economic liberalization and wage inequality in the presence of labour market imperfection. International Review of Economics and Finance, 16, 592–603.

    Article  Google Scholar 

  • Das, S. P. (2002). foreign direct investment and the relative wage in a developing economy’. Journal of Development Economics, 67(1), 55–77.

    Article  Google Scholar 

  • Das, S. P. (2003). Trade and relative wage in a global economy. Review of International Economics, 11(2), 397–411.

    Article  Google Scholar 

  • Davis, D. R. (1998). Does European unemployment prop up American wages? National labor markets and global trade. American Economic Review, 88(3), 478–494.

    Google Scholar 

  • Deardorff, A., & Staiger, R. (1988). An interpretation of the factor content of trade. Journal of International Economics, 24, 93–107.

    Article  Google Scholar 

  • Dev, M. (2000). Economic liberalization and employment in South Asia. Economic and Political Weekly, 40–51.

    Google Scholar 

  • Dube, A., Lester, T. W., & Reich, M. (2010). Minimum wage effects across state borders: Estimates using contiguous counties. Review of Economics and Statistics, 92(4), 945–964.

    Article  Google Scholar 

  • Dube, A., Lester, T. W., & Reich, M. (2016). Minimum wage shocks, employment flows, and labor market frictions. Journal of Labor Economics, 34(3), 663–704.

    Article  Google Scholar 

  • Dutta, M., Kar, S., & Marjit, S. (2013). Product variety, finite changes and wage inequality. Economic Modelling, 35, 610–613.

    Article  Google Scholar 

  • Feenstra, R. C., & Hanson, G. H. (1996). Globalization, outsourcing, and wage inequality. The American Economic Review, 86(2), 240–245.

    Google Scholar 

  • Feenstra, R. C., & Hanson, G. H. (1997). Foreign direct investment and relative wages: Evidence from Mexico’s Maquiladoras. Journal of International Economics, 42, 371–394.

    Article  Google Scholar 

  • Feenstra, R. C., & Hanson, G. H. (2003). Global production sharing and rising inequality: A survey of trade and wages. In E. K. Choi, & J. Harrigan (Eds.), Handbook of international trade. Blackwell Publishers.

    Google Scholar 

  • Gittings, R. K., & Schmutte, I. M. (2015). Getting handcuffs on an octopus: Minimum wages, employment, and turnover. ILR Review, 69(5), 1133–1170.

    Article  Google Scholar 

  • Glazer, A., & Ranjan, P. (2003). Preference heterogeneity, wage inequality, and trade. Journal of International Economics, 60, 455–469.

    Article  Google Scholar 

  • Gorg, H., & Strobl, E. (2002). Relative wages, openness and skill-biased technological change. IZA Discussion Paper Series 596, October. IZA.

    Google Scholar 

  • Green, F., Dickerson, A., & Arbache, J. (2001). A picture of wage inequality and the allocation of labour through a period of trade liberalization: The case of Brazil. World Development, 29(11), 1923–1939.

    Article  Google Scholar 

  • Gustafsson, P., & Segerstrom, P. (2010). Trade liberalization and productivity growth. Review of International Economics, 18(2), 207–228.

    Google Scholar 

  • Hanson, G. H., & Harisson, A. (1999). Trade liberalization and wage inequality in Mexico. Industrial and Labor Economics Review, 52, 271–288.

    Article  Google Scholar 

  • Helpman, E. (2011). Understanding global trade. Harvard University Press.

    Book  Google Scholar 

  • Isgut, A. E. (2001). What’s different about exporters? Evidence from Colombian manufacturing. Journal of Development Studies, 37, 57–82.

    Article  Google Scholar 

  • Jones, R.W. (1971). A three factor model in trade, theory and history. In J. N. Bhagwati, R.W. Jones, R.A. Mundell, & J. Vanek (Eds.), Trade, balance of payments and growth: Papers in international economics in honor of Charles P. Kindleberger. North‐Holland.

    Google Scholar 

  • Jones, R. W., & Marjit, S. (2003). Economic development, trade and wages. German Economic Review, 4(1), 1–17.

    Article  Google Scholar 

  • Kar, S., & Beladi, H. (2004). Skill formation and international migration: Welfare perspective of developing countries. Japan and the World Economy, 16, 35–54.

    Article  Google Scholar 

  • Katz, L., Loveman, G. W., & Blanchflower, D. G. (1992). A comparison of changes in the structure of wages in four OECD countries. NBER Working Paper.

    Google Scholar 

  • Kohler, W. (2004). A specific-factors view on outsourcing. North American Journal of Economics and Finance, 12(1), 31–53.

    Article  Google Scholar 

  • Krugman, P. (1981). Intraindustry specialization and the gains from trade. The Journal of Political Economy, 89(5), 959–973.

    Article  Google Scholar 

  • Lawrence, R. Z. (1994). Trade, Multinationals and Labour. NBER Working Paper No. 4836.

    Google Scholar 

  • Leamer, E. (2000). What is the use of factor contents? Journal of International Economics, 50(1).

    Google Scholar 

  • Marjit, S. (2020). A new Ricardian model of trade, growth and inequality. CESifo Working Paper #8689–2020. November 2020. Germany. ISSN 2364-1428.

    Google Scholar 

  • Marjit, S., & Acharyya, R. (2003). International trade, wage inequality and the developing economy—A general equilibrium approach. Springer-Verlag.

    Book  Google Scholar 

  • Marjit, S., Basu, A., & Veeramani, C. (2019). Growth gains from trade. CESifo Working Paper No 7905.

    Google Scholar 

  • Marjit, S., Beladi, H., & Chakrabarti, A. (2004). Trade and wage inequality in developing countries. Economic Inquiry, 42(2), 295–303.

    Article  Google Scholar 

  • Marjit, S., Ganguly, S., Acharyya, R. (2020). Minimum wage, trade and unemployment in general equilibrium. International Journal of Economic Theory, 1–14.

    Google Scholar 

  • Matusz, S. J. (1996). International trade, the division of labor, and unemployment. International Economic Review, 37(l), 71–84.

    Google Scholar 

  • Marjit, S., & Kar, S. (2005). Emigration and wage inequality. Economics Letters, 88(1), 141–145.

    Article  Google Scholar 

  • Marjit, S., & Mondal, B. (2016). international trade, migration and unemployment—The role of informal sector. Economics and Politics, 28(1), 8–22.

    Article  Google Scholar 

  • Marjit, S., & Mondal, B. (2017). Virtual trade between separated time zones and growth. International Journal of Economic Theory, 13(02), 171–183.

    Article  Google Scholar 

  • Marjit, S., & Das, G. (2020). The new ricardian specific factor model. CESifo Working Paper No. 9052.

    Google Scholar 

  • Neumark, D., & Wascher, W. L. (2008). Minimum wages. MIT Press.

    Book  Google Scholar 

  • Piketty, T. (2013). Capital in the twenty-first century. Belknap Press of Harvard University Press.

    Google Scholar 

  • Ricardo, D. (1817). Principles of political economy and taxation (1st ed.). John Murray.

    Google Scholar 

  • Wang, J., & Gunderson, M. (2012). Minimum wage effects on employment and wages: Difference-in-difference estimates from eastern China. International Journal of Manpower, 33(8), 860–876.

    Article  Google Scholar 

  • Wang, M., Fang, C., & Huang, L. (2009). International knowledge spillovers and wage inequality in developing countries. Economic Modelling, 26(6), 1208–1214.

    Article  Google Scholar 

  • Wood, A. (1998). Globalisation and the rise in labor market inequalities. The Economic Journal, 108, 1463–1482.

    Article  Google Scholar 

  • Wood, A. (1997). Openness and wage inequality in developing countries—The Latin American challenge to East Asian conventional wisdom. World Bank Research Observer, 33–57.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Indian Institute of Foreign Trade, New Delhi, India

    Sugata Marjit

  2. Centre for Training and Research in Public Finance and Policy, Kolkata, India

    Sugata Marjit

  3. CES_Ifo, Munich, Germany

    Sugata Marjit

  4. Indian Institute of Technology, Patna, India

    Meghna Dutta

Authors
  1. Sugata Marjit
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Meghna Dutta
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Meghna Dutta .

Editor information

Editors and Affiliations

  1. Keio University, Tokyo, Japan

    Naoyuki Yoshino

  2. Department of Humanities and Social Sciences (HSS), Indian Institute of Technology Patna, Bihta, Bihar, India

    Rajendra N. Paramanik

  3. Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram, Kerala, India

    Anoop S. Kumar

Rights and permissions

Reprints and permissions

Copyright information

© 2022 The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Marjit, S., Dutta, M. (2022). Trade, Unemployment and Inequality in Product Variety Models—An Analytical Survey. In: Yoshino, N., Paramanik, R.N., Kumar, A.S. (eds) Studies in International Economics and Finance. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-16-7062-6_16

Download citation

Publish with us

Policies and ethics

Search

Navigation