Good Jobs, Bad Jobs, and Trade Liberalization

How do labor markets adjust to trade liberalization? Leading models of intraindustry trade (Krugman (1981), Melitz (2003)) assume homogeneous workers and full employment, and thus predict that all workers win from trade liberalization, a conclusion that is at odds with the public debate. Our paper develops a new model that merges Melitz (2003) with Shapiro and Stiglitz (1984), so also links product market churning to labor market churning. Workers care about their jobs because the model features aggregate unemployment and jobs that pay different wages to identical workers. Simulations show that for reasonable parameter values as many as one-fourth of "good jobs" (those with above average wage) may be destroyed in a liberalization. This is true even as the model shows minimal impact on aggregate unemployment and quite substantial aggregate gains from trade.

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This paper was revised on June 6, 2008

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