Fair Wages and Unemployment in a Small Open Economy

2006

In this paper we develop a model of a multi-sector multi-factor small open economy with involuntary unemployment due to fair wages. The model is used inter alia to analyse the labour market effects of changes in unemployment benefits and the domestic labour supply. Our analysis covers both the case where factor prices do not react to endowment changes - as in the Heckscher-Ohlin model - and the case where they do. Results are sensitive to this distinction, thereby emphasizing the benefit of employing a general production structure that encompasses both cases.