Terms of Trade Shocks and Minimum wages for Dual Labour Market: A CGE Analysis.

Abstract

The aim of this work is to analyse the general equilibrium effects of terms of trade shocks in exportable sectors under particular assumptions about labour market. The model used is based on the Blacke et al. (1995) model of the Mauritian economy, modelled as consisting of three productive sectors: traditional exportable, non traditional exportable and non-traded goods. In this work, two new features are introduced. Firstly, a dual labour market: female and male workers are perfectly mobile across sectors, participating in different proportions in each activity. Secondly, minimum wages, applying to the whole economy, for each type of labour. A series of experiments has been performed to evaluate the general equilibrium effects from favourable and unfavourable shocks in the terms of trade in the exportable sector, paying particular attention to the effects for each type of worker. An import result is that the type-labour intensity is a key to explaining the differences that appear in the effects between the two types of worker when a shock occurs. This work also discusses the alterations in the output-price responses economy wide when a minimum wage is imposed.