Relative Price Changes, Wages and Unemployment in a Specific Factors Model with Search Frictions

This paper analyzes the effects of changes in the relative product price on wages and unemployment of a small open economy in a specific factors model characterized by search frictions. It shows that unemployment and wages move in opposite directions, i.e., high unemployment is associated with low wages and low unemployment with high wages. The reason for the employment effect is found to be individual wage bargaining. Copyright © 2006 The Authors; Journal compilation © 2006 Blackwell Publishing Ltd.