Trade and Labor Market Outcomes

51 Pages Posted: 31 Jan 2011

See all articles by Elhanan Helpman

Elhanan Helpman

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Oleg Itskhoki

Princeton University - Department of Economics

Stephen J. Redding

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: January 2011

Abstract

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.

Keywords: inequality, labor market policy, trade, unemployment

JEL Classification: F12, F16, J64

Suggested Citation

Helpman, Elhanan and Itskhoki, Oleg and Redding, Stephen J., Trade and Labor Market Outcomes (January 2011). CEPR Discussion Paper No. DP8191. Available at SSRN: https://ssrn.com/abstract=1749812

Elhanan Helpman (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-4690 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Oleg Itskhoki

Princeton University - Department of Economics ( email )

Fisher 306
Princeton, NJ 08544-1021
United States
+1 (609) 258-5493 (Phone)

HOME PAGE: http://www.princeton.edu/~itskhoki

Stephen J. Redding

Princeton University ( email )

Princeton, NJ 08544-1021
United States

HOME PAGE: http://www.princeton.edu/~reddings/

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