1UNEMPLOYMENT AND TRADE LIBERALISATION

In contrast to the focus of the public debate over trade liberalisation on job losses there is a widespread view among economists that employment and trade issues should be considered separately. Such a view is found in recent Productivity Commission reports and simulation exercises. This view cannot be justified theoretically as standard general equilibrium trade models with wage floors generate unemployment, complicating the effects of trade liberalisation on employment, income distribution and national welfare. Given persistent unemployment, freer trade can lead to either gains or losses depending on the production technology, severity of the factor market distortion, factor intensities of the industries, and conditions in trading partners. Opening up trade with countries with lower wage floors is more likely to lead to losses. Tariffs on goods which use the labour subject to the wage floor can be welfare improving, although they are not the optimal policy, which would be removing the labour market distortion. Trade liberalisation would be better advanced by including endogenous employment in trade policy simulation exercises and by discussing employment effects rather than brushing them aside as temporary adjustment problems or regional difficulties