International trade and unemployment: Skill differences and adjustment

In the paper proposed the adjustment process of high-income countries (represented by economy H) to challenges from fast-developing China is investigated in a stylized setting. We assume two goods manufactured (with different skill requirements) and consumed in both economies. Production typically requires two types of labor, i.e. skilled and unskilled. Because there exists a minimum wage in high income countries adjustment to China’s entering the world market leads to unemployment of unskilled labor in H. After one period of searching for a job idle laborers might become employed again in the “other” sector if their marginal product is at least as high as the real minimum wage. For unemployed low-skilled workers there exists also the (time-consuming) possibility of re-education to become skilled – and therefore employed. In such a setting the adjustment process in H reacting to Chinese competition will be investigated. The effects of different parameter constellations will be also taken account. Finally the consequences of influx of migrate workers into “economy H” will be investigated as well as effects of changing compositions of the skill mix in China.