Abstract:

This study investigates how foreign trade liberalization affects unemployment by using the Melitz model (2003), which is one of the intra-industry trade models expressing trade between countries with similar technologies, preferences, and cost structures that make up a large part of international trade. The Melitz model (2003) is remodelled by efficiency wage theory to endogenize unemployment. The model is solved by numerical method. It is assumed that market expansion and competition in the market occur simultaneously. The effect of liberalization on unemployment varies depending on which of two factors, market expansion or competition, dominates the other. According to the results, unemployment decreases when market expansion dominates the competition, while unemployment increases if competition dominates market expansion. In addition, it has been observed that there is an increase in the total amount of production, productivity, and unemployment insurance when market expansion is dominant. Also, it has been observed that there is a decrease in the total amount of production, productivity level, and unemployment insurance when competition in the market is dominant.

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