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Imperfect labor mobility and the trickle-down effect in international trade

Sungwan Hong (Graduate School of Economics, The University of Tokyo, Tokyo, Japan)
Soo Hyun Oh (Department of International Trade, Korea Institute for International Economic Policy, Sejongsi, South Korea)
Seung-Gyu Sim (University of Tokyo, Tokyo, Japan)

Journal of Korea Trade

ISSN: 1229-828X

Article publication date: 5 March 2018

176

Abstract

Purpose

Unlike the common belief in the so-called “trickle-down effect,” trade-induced output growth in a small open economy does not necessarily improve the domestic welfare of the economy. The purpose of this paper is to analyze the conditions under which the trickle-down effect does not work properly such that the connection between trade-induced output growth and welfare improvement is broken.

Design/methodology/approach

This paper introduces an inter-sectoral migration barrier in the general equilibrium model and conducts various simulation experiments under reasonable parameter values.

Findings

This paper demonstrates that subsidizing export industries may raise the total value-added of an economy but deteriorate aggregate welfare. This worsens especially when the supply of non-tradable domestic goods is inelastic, and the demand for them is more substitutable by tradable goods.

Practical implications

To reinforce the trickle-down effect, it is necessary to facilitate efficient labor reallocation and to induce capitalization in the non-tradable sector.

Originality/value

That output growth and welfare improvement do not always move in the same direction requires a reappraisal of the former common belief on the trickle-down effect which emphasizes output growth as an indicator of welfare improvement.

Keywords

Acknowledgements

The authors have benefited from discussions with Seung Mo Choi, Gihoon Hong, and Dongwoo Yoo. The authors assume full responsibility for any errors, and for the views expressed in this paper, which do not necessarily reflect the official opinion of Korea Institute for International Economic Policy. All errors are of the authors.

Citation

Hong, S., Oh, S.H. and Sim, S.-G. (2018), "Imperfect labor mobility and the trickle-down effect in international trade", Journal of Korea Trade, Vol. 22 No. 1, pp. 68-83. https://doi.org/10.1108/JKT-09-2017-0084

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Korea Trade and Research Association

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