International Trade and Unemployment—the Worker-selection Effect

Authors


  • We thank two anonymous referees and the associate editor, Hartmut Egger, for very insightful comments. The paper also benefitted from comments by Laszlo Goerke, Jürgen Meckl, Claus Schnabel, Rainer Voßkamp and participants at conferences in Oslo (EEA), Göttingen (Workshop on International Economics) and Rauischholzhausen (MAGKS).

Abstract

This paper investigates the labor market effects of trade liberalization. We incorporate trade unions and heterogeneous workers into the Melitz framework. Workers differ with respect to their abilities. Our main findings are: (i) trade liberalization harms low-ability workers, they lose their job and switch to long-term unemployment (worker-selection effect); (ii) high-ability workers are better off in terms of both higher wages and higher employment; (iii) if a country is endowed with a large fraction of low-ability workers, trade liberalization leads to a rise in aggregate unemployment—in this case, trade liberalization may harm a country's welfare; (iv) the overall employment and welfare effect crucially hinges on the characteristics of the wage bargain.

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