Introduction:

The 'wealth of nations' – or more precisely: positive developments of labour markets and international convergence in terms of decreasing income inequality – is not necessarily a result of international free trade. Moreover, shortcomings of the underlying theories depict why trade liberalisation is such a controversial topic. However, usually when policies fail to increase a nation's wealth, it is not the theory being challenged but it is the lax implementation, which is blamed.

Empirically, neither macroeconomic development nor international convergence among developed and developing countries – and their workforces – can clearly be attested as positive effects of trade openness. Even though the empirical evidence is quite split on this issue, there seems to be consensus among economists that international integration of (labour) markets leads to a situation, which is not necessarily socially just, but improves the wealth of all participating nations in terms of employment and consumption possibilities, as well as development. In fact, the promised positive effects of free trade and labour market flexibility are distributed unequally, and can as well be interpreted as being negative for certain groups, such as low-skilled workers. Nevertheless, free trade and labour market flexibility are policy recommendations where economists seem to be almost unified.

There are several explanations for international divergence and income inequality – globalisation, technological progress, institutional changes etc. International trade – and generally conventional trade theories such as theory of comparative advantage and its advancements – implies a division of labour and builds on marginal productivity theory. In order to discuss free trade and labour market flexibility, the theoretical background of trade openness with a focus on labour market effects will be scrutinized.