Vol. 2, Issue 6 (2017)
Efficiency wage and match frictions in a two-sector general equilibrium model
Author(s): Titas Kumar Bandopadhyay
Abstract: This paper presents a two-sector general equilibrium model by accommodating efficiency wage and match frictions in the labour market. The two sectors are the low-skill sector and the high-skill sector. The two agents are the workers who supply labour and the entrepreneurs who supply capital. Production starts when the two agents are matched. Although unattached entrepreneur (idle capital) is mobile across the sectors, unemployed labour is not due to skill differenences. We examine the consequences of trade reforms and foreign capital inflows on the steady-state unemployment rates in the two sectors. We find that trade reforms decrease frictional unemployment rate in the high-skill sector and increase it in the low-skill sector. However, inflows of foreign capital decrease frictional unemployment rates in both sectors. These results are similar to the standard HOS results.