Tariff that Exports Unemployment: Home Market Effect Meets Shapiro and Stiglitz

This note points towards an important omission in the literature of trade with increasing returns to scale, and equilibrium unemployment as in shirking type models. The general consensus appears to be that free trade via proliferation of varieties is likely to increase real wage and thus relaxing the no-shirking constraint should increase employment. Upon recognising the presence of transport cost, this note shows otherwise.