NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade and Labor Market Outcomes

Elhanan Helpman, Oleg Itskhoki, Stephen Redding

NBER Working Paper No. 16662
Issued in January 2011
NBER Program(s):   ITI

This paper reviews a new framework for analyzing the interrelationship between inequality, unemployment, labor market frictions, and foreign trade. This framework emphasizes firm heterogeneity and search and matching frictions in labor markets. It implies that the opening of trade may raise inequality and unemployment, but always raises welfare. Unilateral reductions in labor market frictions increase a country's welfare, can raise or reduce its unemployment rate, yet always hurt the country's trade partner. Unemployment benefits can alleviate the distortions in a country's labor market in some cases but not in others, but they can never implement the constrained Pareto optimal allocation. We characterize the set of optimal policies, which require interventions in product and labor markets.

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Document Object Identifier (DOI): 10.3386/w16662

Published: E.Helpman, O.Itskhoki, S. Redding, Trade and labor market outcomes, in Daron Acemoglu, Manuel Arellano and Eddie Dekel (eds.), Advances in Economics and Econometrics: Theory and Application. Tenth World Congress , Volume II: Applied Economics (Cambridge: Cambridge University Press), 2013.

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