Unemployment

A key assumption of the two numerical examples is that labor is fully employed in each country. For example, we have said that Portugal has to give up 3 barrels of wine for every bale of wool. That's because they have to take labor away from wine production to produce the wool. But if there is unemployed labor in Portugal that could be put to work producing wool, then Portugal could have wool without any sacrifice of wine at all. Similarly, if Japan can put unemployed workers to work producing bulldozers, she may not have to sacrifice the 3 cars per bulldozer. Maybe she will sacrifice nothing!

This is a real and serious qualification to the comparative advantage model, and it certainly is politically important. Policy-makers in many countries believe that exports "create jobs" but that imports "destroy jobs." This has led to the modern counterpart to mercantilism -- government policies in some countries that aggressively promote exports while limiting imports, with the hope that the export surplus will reduce unemployment.

Many economists doubt that this will work. Whatever one may think about abstract "full employment," they believe that the resources to expand one industry will mean reductions in production from other industries, and that jobs created or saved by this strategy will come at a high cost, if they are created or saved at all.

On the other hand, if it is true that mercantilist policy can reduce unemployment, then national policy makers face a very difficult dilemma. Will the country be better off with trade according to comparative advantage, which is efficient, or with more jobs, inefficient jobs but better than no jobs at all? On an issue like that, "Where you stand depends on where you sit," more often than not.

Unequal Trade