FAIR WAGES IN THE OPEN-ECONOMY

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