Efficiency wages, unemployment and international factor movements

This paper examines the implications of unemployment resulting from efficiency wages for international factor movements in a standard Heckscher-Ohlin model where the relative size of the endowments of skilled and unskilled workers and the efficiency wage induced unemployment level in the unskilled labour market are simultaneously determined given the population, supply of capital and its distribution in the economy. Capital in the economy is used only to train individuals for the skilled labour market, where workers are fully employed. It is shown that the optimum labour inflow in the market with domestic distortion and the optimum capital inflow are always positive because they reduce the severity of distortion by raising employment and income for the residents. The income and employment of foreigners also increase. Under this situation the optimum labour or capital outflow on the other hand is always zero. These conclusions directly contradict the result obtained for international factor movements in the presence of exogenously determined unemployment.