When trade hurts: Consumption indivisibilities and labor market distortions

Kala Krishna, Cemile Yavas

Research output: Contribution to journalArticle

7 Scopus citations

Abstract

We present a simple model where complementarities between wages and demand due to factor market distortions can make a transition economy worse off from trade. Prior to trade, a virtuous circle prevails: high wages in industry support a high demand for indivisible industrial goods, which in turn supports high wages. However, factor market distortions in the transition economy create a comparative disadvantage in industry. Opening up to trade results in the import of indivisibles and a fall in manufacturing wages, breaking this virtuous circle. Consequently, trade liberalization without structural reform can have serious adverse effects in a transition economy.

Original languageEnglish (US)
Pages (from-to)413-427
Number of pages15
JournalJournal of International Economics
Volume67
Issue number2
DOIs
StatePublished - Dec 1 2005

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Finance

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