Abstract
To combat COVID-19 the entire world has resorted to global lockdown implying restriction on international labor migration and trade. This paper aims to check the effect of such restrictions on the unemployment of unskilled labor in the source country. In competitive general equilibrium framework with three goods and four factors, restriction on migration raises unemployment for given factor intensity. The results remain same even in a slightly different structure of the economy. In case of trade restriction, however, the rise or fall in unemployment depends on both the structure of the economy and the factor intensity assumption.
Acknowledgments
We are grateful to the editor of the journal and the anonymous reviewer for their support in publishing this article. We are also thankful for the comments and suggestions provided by the participants of webinars held during the lockdown phase. However, the usual disclaimer applies.
Conflict of interest statement: There is no conflict of interest.
Appendix A
Determination of wage in sector Z
The wage is determined by the labor unions by maximizing their utility function subject to the labor demand. We assume the firms to be price takers. Let the utility function of the union be: U = U(w, LZ, pZ); where w is the wage rate, LZ is the employment in Z, pZ is the relative price of Z. U is quasi-concave and increasing in w and LZ.
The labor demand function is LZ = Zcw = LZ (w, r), here r is the rent of K, cw is the partial derivative of the cost function, c(w, r), and Z is the output. The demand for labor is negatively related to wage.
The first order condition implies
The wage rate is determined from the above condition. The second order condition of the maximization problem also holds:
Appendix B
Expressing relative change by “ˆ” notation, from Equations (1)–(3) we get,
Putting the value of
As
Substituting the value of
Using the value of
Here, following the factor intensity assumptions of the model, (λSXλKY − λSYλKX) > 0. Therefore, as
From (B.4),
Since Z is L intensive and Y is K intensive, a fall in PX reduces the level of employment of unskilled labors.
Appendix C
From Equations (15)–(17) we get,
From (C.2),
With changes in wS and r there are changes in the per unit factor requirements of X and Y. Using the Envelope condition and the elasticity of substitution between S and K in X, σX, we get
Similarly, assuming
Following this, using Equations (18)–(21)
Using Cramer’s rule, from (C.4) and (C.7) we get the following values
From (C.5),
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