MULTIPLE FREE-TRADE EQUILIBRIA IN MICRO MODELS OF UNEMPLOYMENT

Neoclassical theory suggests that trade patterns are linked to autarkic differences in relative opportunity costs. We demonstrate that when the Heckscher-Ohlin-Samuelson model is extended to allow for unemployment, there are forces present that create multiple free trade equilibria, even when both countries are identical and autarkic equilibrium is unique. There is no necessary link between relative opportunity costs and trade patterns. While our primary focus is on search-generated unemployment, we argue that the analysis also applies to situations where unemployment is generated by minimum wages, efficiency wages, or implicit contracts. © 1991.