Econometrica: Apr, 1957, Volume 25, Issue 2

Employment and Money Wages under Balanced Foreign Trade

https://doi.org/0012-9682(195704)25:2<314:EAMWUB>2.0.CO;2-J
p. 314-324

Hans Brems

The present paper is an attempt to relate the theory of wages, the theory of fiscal policy, and the theory of international trade to one another. The purpose is to illuminate the dilemma faced by certain Western European economies subjected to a threefold pressure from powerful labor unions asking for higher wages, from the Organization for European Economic Cooperation asking for freer trade, and from international competition. The medium is a simplified model marrying the elasticity and the absorption approaches to international trade theory and assuming that fiscal policy is successfully applied to keep the balance of trade equalling zero. The system of equations is solved for domestic output to which domestic employment is assumed to be in proportion. The effect upon the solution of manipulating domestic factor prices is determined. Available empirical measurements of demand elasticities are applied to the solution.