Economic recession, demand constraint and labour markets in a developing economy

The paper develops a three-sector, specific factor, general equilibrium model with two high-skill sectors and unemployment of skilled labour. One of the two high-skill sectors produces a non-traded commodity whose aggregate demand consists of both domestic demand and an exogenously given foreign demand. The consequences of a decline in the foreign demand for the non-traded good resulting from worldwide economic recession on the skilled and unskilled labour markets in a developing economy have been examined. The analysis finds that the effects on the labour markets crucially hinge on the relative factor intensities of the two high-skill sectors and that through adoption of appropriate fiscal measures; the country can shield its workforce from the rage of global economic downturn.