INTERNATIONAL-TRADE, THE DIVISION-OF-LABOR, AND UNEMPLOYMENT

I merge a model of monopolistic competition in the production of inter mediate goods with the Shapiro-Stiglitz model of efficiency wages to s how that the introduction of international trade leads to increased em ployment in both countries. The intuition is that trade results in a g reater division of labor due to the increased variety of available int ermediates. The resulting increase in productivity yields higher real wages, thus relaxing the efficiency-wage constraint and permitting an increase in employment. The increase in employment then magnifies the benefits of trade. Similar reasoning applies even when unemployment is generated from other processes.