International Trade, the Division of Labor, and Unemployment

Abstract

The author merges a model of monopolistic competition in the production of intermediate goods with the Shapiro-Stiglitz model of efficiency wages to show that the introduction of international trade leads to increased employment in both countries. The intuition is that trade results in a greater division of labor due to the increased variety of available intermediates. The resulting increase in productivity yields higher real wages, thus relaxing the efficiency-wage constraint and permitting an increase in employment. The increase in employment then magnifies the benefits of trade. Similar reasoning applies even when unemployment is generated from other processes. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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