Labor Market Rigidities, Trade and Unemployment

Elhanan Helpman, Oleg Itskhoki

NBER Working Paper No. 13365
Issued in September 2007
NBER Program(s):International Trade and Investment

We study a two-country two-sector model of international trade in which one sector produces homogeneous products while the other produces differentiated products. The differentiated-product industry has firm heterogeneity, monopolistic competition, search and matching in its labor market, and wage bargaining. Some of the workers searching for jobs end up being unemployed. Countries are similar except for frictions in their labor markets. We study the interaction of labor market rigidities and trade impediments in shaping welfare, trade flows, productivity, price levels and unemployment rates. We show that both countries gain from trade but that the flexible country -- which has lower labor market frictions -- gains proportionately more. A flexible labor market confers comparative advantage; the flexible country exports differentiated products on net. A country benefits by lowering frictions in its labor market, but this harms the country's trade partner. And the simultaneous proportional lowering of labor market frictions in both countries benefits both of them. The model generates rich patterns of unemployment. Specifically, trade integration -- which benefits both countries -- may raise their rates of unemployment. Moreover, differences in rates of unemployment do not necessarily reflect differences in labor market rigidities; the rate of unemployment can be higher or lower in the flexible country. Finally, we show that the flexible country has both higher total factor productivity and a lower price level, which operates against the standard Balassa-Samuelson effect.

download in pdf format
   (437 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13365

Published: Elhanan Helpman & Oleg Itskhoki, 2010. "Labour Market Rigidities, Trade and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 77(3), pages 1100-1137, 07. citation courtesy of

Users who downloaded this paper also downloaded* these:
Helpman, Itskhoki, and Redding w16662 Trade and Labor Market Outcomes
Helpman, Itskhoki, Muendler, and Redding w17991 Trade and Inequality: From Theory to Estimation
Helpman, Itskhoki, and Redding w14122 Wages, Unemployment and Inequality with Heterogeneous Firms and Workers
Helpman, Itskhoki, and Redding w14478 Inequality and Unemployment in a Global Economy
Helpman w15764 Labor Market Frictions as a Source of Comparative Advantage, with Implications for Unemployment and Inequality
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us