Estrategias para cualificar la competencia argumentativa en el discurso literario

We now turn to the small country. Contrary to many questions in international trade, the small open economy case turns out to be more complicated if wages are rigid. This is due to the fact that a small country has no influence on world market prices and maintaining domestic wage levels unavoidably leads to complete specialisation. This modification of relative prices has to be considered as an additional effect. Conse- quently, it matters a great deal how the minimum wage is specified — either in nominal terms or in real values as in units of goodx or good y. To compare trade flows with rigid and flexible wages, it is crucial to identify the production structure of home. It will turn out that this depends on the definition of the minimum wage.

Figure 5.5 shows the same transformation curve of home as Figure 5.3 in the pre- vious section. The only difference is that in this case, the rigid wage economy cannot defend its autarky prices on the world market. Rather relative prices in the rest of the world will become the relevant terms of trade in the small open economy. In other words, relative goods prices pf lex are exogenously given. Again, B denotes production

and consumption in autarky withABPxE representing the transformation curve given

the minimum wage. While the previous section discussed an interior solution where home ended up somewhere on the Rybczynski line, the economy is now driven to complete specialisation of the capital-intensive commodity. Production of the labour intensive good collapses entirely. Output of x now depends on the definition of the wage floor. If defined in terms of good x, Px will be the production point. Unem-

ployment remains on its maximum level. One can imagine that the economy is driven down the Rybczynski line at given autarky prices paut. With complete specialisation,

Figure 5.5: Trade and rigid wages in a small open economy pflex pflex ) (pflex ϕ Cx H Px Py D E x pflex Pflex B ) (paut ϕ A paut y ) (pflex ϕ Cflex

however, home can no longer defend the high price of the labour intensive commodity and hence, the relative price of x rises. In order to keep real wages constant in terms of goodx, nominal wages have to increase by the same percentage as px. As x is the

only good being produced in the economy using the entire capital stock, the capital return also rises by the relative increase ofpx. Marginal productivity of capital is un-

affected because in Px, the same capital-labour ratio is employed as both in autarky

and along the Rybczynski line. But the marginal revenue product, which determines factor rewards, rises due to the price increase.

If one defines the real wage in terms of the labour intensive good y, firms could pay lower nominal wages and thus employ more workers. As the value of their output increases, the minimum wage constraint is thereby relaxed. The magnitude of new employment (relative toPx) depends on the elasticity along the marginal revenue curve

of labour. In Figure 5.5,Py denotes output ofxin this scenario. Py must lie to the right

ofPx, but to the left ofD. This must be true becauseDbelongs to the Rybczynski line

Pf lexD real wages have declined in terms of both goods due to the Stolper-Samuelson

effect.

Finally, the minimum wage could be indexed to the inflation rate. With homothetic preferences, the price index would be pindex = αpx + (1−α)py where α denotes the

constant income share spent on commodity x while (1₋α) is the expenditure share for goody. Therefore, the wagefloor would bew/pindex. Depending onα, the economy

would producex in the range ofPx andPy. The higher α the less employment will be

generated and vice versa. Withflexible wages, of course, the change of relative prices frompauttopf lex would drive the economy along the transformation curveAE toPf lex.

The change in industry structure depends on the elasticity along the transformation curve.

We now turn to consumption. As consumer prices change for households in home, the consumption mix in the new equilibrium will be different from autarky. The extent of consumption change depends on the price elasticity of demand. Due to homothetic preferences, consumption ratios can be expressed along a ray from the origin as long as relative prices do not change: x/y =ϕ(p), whereϕ0 _{<0. With regard to the diagram,} the question is how much will the ray describing the function ϕ(p) change when p

changes. Thus, we getCf lex as the consumption point with flexible wages andCx with

rigid wages where the minimum wage is defined in terms of the capital intensive good here.

This enables us to compare trade vectors withflexible and inflexible labour markets. It will turn out that both a lower and a higher volume of trade is possible relative to the flexible wage case. The volume of trade with flexible wages is described by the vector

Pf lexCf lex. Shifting the dashed line to the right until it crossesPf lex, it becomes clear

that — for the situation depicted in Figure 5.5 — in equilibrium, the small open economy trades more than it would withflexible wages. The trade vector with unemployment is represented by PxCx, which is clearly larger than Pf lexCf lex. If the wage floor was

defined in terms of a consumption basket or in terms of the labour intensive good, there would also be a pathological trade boom. However, the result is not unique. One can

easily imagine a combination of elasticities that generates a smaller tradeflow than in a flexible wage world. Say, the elasticity of demand is higher than depicted in Figure 5.5. Then ϕ(pf lex) would be steeper thus cutting the horizontal axis further to the

right. If the elasticity is sufficiently higher,PxCx would be smaller thanPf lexCf lex. As

a second possibility, one can imagine that the difference in relative endowments and thus in relative prices is larger between the small open economy and the rest of the world. Then,pf lexwould be steeper, thus driving the economy further down theflexible

wage transformation curve AE. Depending on how the minimum wage is fixed, it is possible that home would export fewer goods in the presence of unemployment. Hence, for a small open economy, it is not clear that rigid wages imply excessive tradeflows. Nevertheless, the production of the capital intensive commodity always outweighs the output level with incomplete specialisation.

At least we can identify parameters that determine the volume of trade: On the supply side the elasticity along theflexible wage transformation curve and the elasticity along the marginal revenue curve of labour if the wage is either defined in terms of a basket or in terms of the labour intensive commodity. On the demand side, the price elasticity of demand turns out to be the crucial parameter. The higher the elasticity along the flexible wage transformation curve AE, the less likely is a pathological vol- ume of trade ceteris paribus. Also, as stated before, the larger the difference between autarky and world market prices, the less likely are excessive tradeflows. A high elas- ticity of the marginal revenue curve of labour in sectorx, however, makes it more likely that the small rigid wage country’s volume of trade is larger than with labour market clearance. On the demand side, a high price elasticity of demand ceteris paribus makes excessive trade flows less likely. Contrary to the large open economy, the volume of trade does not provide a measure of welfare loss if unemployment emerges simultane- ously. Rather, starting from Px more trade improves welfare because unemployment

can be reduced and thereby production increased. Nevertheless, welfare is lower than in autarky given that a whole industry vanishes.

to trade. We have seen that complete specialisation does not equate factor prices across both countries which leaves an incentive for factors to relocate. The domestic wage rate exceeds the foreign labour remuneration, whereas the capital return is lower than abroad. The differences in factor prices can only be maintained if trade is the only linkage between both regions. With either capital or labour mobility, however, these differentials cannot be sustainable as there is an incentive for domestic capital to shift abroad and foreign labour to migrate to home, respectively. This enhances convergence of factor prices and generates further unemployment in home. Due to our small country assumption, however, home cannot equate relative factor endowments of the entire world to its autarky level. Hence, 100 percent of the domestic labour force will become unemployment again. Either foreign workers are employed jointly with domestic capital in home or the entire capital stock is driven out of the rigid wage region.

Although this is too harsh a result to be taken literally for policy debate, it impres- sively demonstrates the catastrophic effects of defending national wages against the forces of globalisation for a small open economy.

Result 5.3 Rigid wages drive the small open economy into full specialisation of the capital intensive good. However, trade does not unambiguously generate excessive tradeflows. The elasticities on both the demand and the supply side crucially influence the outcome. Contrary to a model with pure factor mobility, a small open economy that is only linked via commodity trade to the rest of the world, can theoretically prevent extinction by complete specialisation. The difference in factor prices vis-à-vis the rest of the world can only be sustained without factor mobility. Otherwise, the entire domestic labour force would be driven into unemployment again.