Adapting to North-South Trade: A General Equilibrium Approach to Policy Options.

This paper develops a general equilibrium model of North-South trade with different wage setting regimes and a nontradeables sector. Simulations confirm that substantial gains from trade openness can be accompanied by a significant deterioration in the position of unskilled Northern workers. Increasing labor market flexibility will not correct this problem and protectionist measures, such as enforcing labor standards on the South, will reduce global income. Less conventional labor market policies, such as employment subsidies for unskilled workers, offer a more effective response, and one, moreover, which benefits workers in both the North and South. Copyright 1997 by Royal Economic Society.