Market integration between developing countries and urban unemployment–the perspective of the real minimum wage

Abstract

This article examines the effect of market integration through free trade and factor mobility on the urban unemployment rate of a developing country whose economy is large enough to influence the terms of trade. From the perspective of the real minimum wage, it is shown that free trade would result in a rise or a decline in the country's urban unemployment rate, depending on its trade pattern. While the effect of labour mobility on a country's urban unemployment rate is determined by the difference between the ratio of would-be farmers to incoming workers and that of farm leavers to outgoing workers, the result of capital mobility will depend on a comparison of the initial urban unemployment rates of two countries.

Acknowledgements

The author is very grateful to an anonymous referee and the Editor for many helpful comments and suggestions. Any remaining shortcomings are the author's responsibility.

Notes

¹ The sector-specific capital is also explained in Tang and Tseng (2004).

² Since the specific factor model is employed in this study, the technology of each sector with a fixed specific factor exhibits decreasing returns to scale based on the labour input.

³ The mathematical analysis is in the appendix.

⁴ The mathematical analysis is provided in the appendix.