International Trade and Unemployment: A Quantitative Framework
78 Pages Posted: 5 Dec 2012
Date Written: December 2014
Abstract
Quantifying the welfare effects of trade liberalization is a core issue in international trade. Existing frameworks assume perfect labor markets and therefore ignore the effects of aggregate employment changes for welfare. We develop a quantitative trade framework which explicitly models labor market frictions. To illustrate, we assess the effects of trade and labor market reforms for 28 OECD countries. Welfare effects of trade agreements are magnified when accounting for employment changes. While employment and welfare increase in most countries, some experience higher unemployment and lower welfare. Labor market reforms in one country have small positive spillover effects on trading partners.
Keywords: international trade, unemployment, trade costs, structural estimation, gravity equation
JEL Classification: F140, F160, F130
Suggested Citation: Suggested Citation