A Generalized Heckscher-Ohlin-Samuelson Model with Search Unemployment

By incorporating labor market frictions and search unemployment into the Heckscher-Ohlin-Samuelson (HOS) framework, we show that the classical trade theorems are still valid in general, but may not hold in some circumstances. Depending on the relative labor market costs across sectors, we show that employed labors’ return may be tied to the return to capital irrespective of the sector they are attached to and that an increase in the endowment of labor (capital) may lead to an increase in the output of either labor- or capital-intensive goods, which extends the Stopler-Samuelson theorem and Rybczynski theorem respectively. We demonstrate that free trade will equalize the factor price of capital and the expected life time income of unemployed labor across countries, but not that to employed labor. In equilibrium, trade patterns are jointly determined by factor endowment of a country and its relative factor intensity in sector but are independent of its relative factor intensity in production. Finally, our model provides an interesting theoretical dimension in explaining the ‘missing trade’ phenomenon.