Trade and Frictional Unemployment in the Global Economy
74 Pages Posted: 8 Jul 2015 Last revised: 2 Dec 2019
Date Written: July 2015
We develop a multi-country, multi-sector trade model featuring risk-averse workers, labor market frictions, unemployment bene?ts, and equilibrium unemployment. Trade opening leads to a reduction in unemployment when it simultaneously raises welfare and reallocates labor towards sectors with lower-than-average labor market frictions. We then estimate and calibrate the model using employment data from 31 OECD countries and worldwide trade data. Finally, we quantify the potential unemployment, real wage, and welfare e?ects of repealing NAFTA and raising bilateral tari?s between the US and Mexico to 20 percent. This policy would increase unemployment by 2.4 percent in the us and 48 percent in Mexico.
Keywords: labor market frictions, trade, unemployment
JEL Classification: F15, F16, F17
Suggested Citation: Suggested Citation