Trade and Labor Market Outcomes
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.
We thank the National Science Foundation for financial support, Eliav Danziger for research assistance, and Jane Trahan for editorial assistance. This paper is based on the Frisch Memorial Lecture from the World Congress of the Econometric Society 2010 in Shanghai. We are grateful to conference participants for their comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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.