Economic recession, skilled unemployment and welfare

The paper develops a three-sector, specific factor, general equilibrium model with two high-skill sectors and unemployment of skilled labor. One of the two high-skill sectors produces a non-traded commodity whose aggregate demand consists of both domestic demand and an exogenously given foreign demand. The consequences of a decline in the foreign demand for the non-traded good resulting from worldwide economic recession on the skilled and unskilled labor markets in a developing economy have been examined. The analysis finds that the effects on the labor markets crucially hinge on the relative factor intensities of the two high-skill sectors and that through the adoption of appropriate fiscal measures; the country can shield its workforce from the rage of global economic downturn.

Research Highlights► A three-sector general equilibrium model with two high-skill sectors and unemployment of skilled labour is developed. ► It examines the consequences of worldwide economic recession on the labor markets in a developing economy. ► The effects of recession on the labour markets hinge on the relative factor intensities of the high-skill sectors. ► Adoption of appropriate fiscal measures can shield the workforce from the rage of economic downturn.