Globalization and Labor Market Outcomes: Wage Bargaining, Search Frictions, and Firm Heterogeneity

51 Pages Posted: 3 Nov 2008

See all articles by Gabriel J. Felbermayr

Gabriel J. Felbermayr

University of Stuttgart-Hohenheim

Julien Prat

University of Vienna; IZA Institute of Labor Economics

Hans‐Jörg Schmerer

Government of the Federal Republic of Germany - Institute for Employment Research (IAB)

Abstract

We introduce search unemployment - la Pissarides into Melitz' (2003) model of trade with heterogeneous firms. We allow wages to be individually or collectively bargained and analytically solve for the equilibrium. We find that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves aggregate productivity net of transport costs. We show that this condition is likely to be met by a reduction in variable trade costs or the entry of new trading countries. On the other hand, the gains from a reduction in fixed market access costs are more elusive. Calibrating the model shows that the positive impact of trade openness on employment is significant when wages are bargained at the individual level but much smaller when wages are bargained at the collective level.

Keywords: trade liberalization, unemployment, search model, firm heterogeneity

JEL Classification: F12, F15, F16

Suggested Citation

Felbermayr, Gabriel J. and Prat, Julien and Schmerer, Hans-Joerg, Globalization and Labor Market Outcomes: Wage Bargaining, Search Frictions, and Firm Heterogeneity. IZA Discussion Paper No. 3363. Available at SSRN: https://ssrn.com/abstract=1294530 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Gabriel J. Felbermayr (Contact Author)

University of Stuttgart-Hohenheim ( email )

Keplerstraße 17
D-70174 Stuttgart
Germany

Julien Prat

University of Vienna ( email )

Bruenner Strasse 72
Vienna 1210, Vienna
Austria

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Hans-Joerg Schmerer

Government of the Federal Republic of Germany - Institute for Employment Research (IAB) ( email )

Regensburger Str. 104
Nuremberg, 90478
Germany

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