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

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.

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