Labor Market Segmentation in a Two-Sector Model of an Open Economy

24 Pages Posted: 15 Feb 2006

Date Written: April 1990

Abstract

The paper examines formally the effects of labor market segmentation in a two-sector open economy model. The model demonstrates how the structure of the labor market affects the real exchange rate, defined as the relative price of traded and home goods, and is then used to examine the effects of two common labor market policies: increasing the degree of primary market coverage, and implementing wage restraint in the primary market. It is shown that increasing the degree of primary market coverage increases unemployment and leads to a real appreciation. Real wage restraint in the primary market, on the other hand, reduces unemployment, and has ambiguous but probably small effects on the real exchange rate.

JEL Classification: 411, 821

Suggested Citation

Demekas, Dimitri G., Labor Market Segmentation in a Two-Sector Model of an Open Economy (April 1990). Available at SSRN: https://ssrn.com/abstract=884719 or http://dx.doi.org/10.2139/ssrn.884719

Dimitri G. Demekas (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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