Fair Wages in the Open Economy

We show how an extended theory of fair wages can be incorporated in the two-by-two Heckscher-Ohlin model. An important feature of the model is the existence of involuntary unemployment. Several results stand out. First, there is no longer a simple relation between measures of factor abundance and trade patterns. Second, factor-price equalization will generally not occur. Third, differences in social norms explain why terms of trade shocks produce nonuniform adjustments in real wages and unemployment across otherwise similar countries. Fourth, losses from trade may occur. Finally, in countries where fairness considerations are important, tariffs may increase welfare.