TY - JOUR
T1 - When trade hurts
T2 - Consumption indivisibilities and labor market distortions
AU - Krishna, Kala
AU - Yavas, Cemile
PY - 2005/12
Y1 - 2005/12
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=28044450191&partnerID=8YFLogxK
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U2 - 10.1016/j.jinteco.2004.12.004
DO - 10.1016/j.jinteco.2004.12.004
M3 - Article
AN - SCOPUS:28044450191
SN - 0022-1996
VL - 67
SP - 413
EP - 427
JO - Journal of International Economics
JF - Journal of International Economics
IS - 2
ER -