Publications
- Labor Market Rigidities, Trade and Unemployment
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- by Helpman, Elhanan; Itskhoki, Oleg
- We study a two-country two-sector model of international trade in which one sector produces
homogeneous products while the other produces differentiated products. The differentiated-
product industry has
rm heterogeneity, monopolistic competition, search and matching in
its labor market, and wage bargaining. Some of the workers searching for jobs end up being
unemployed. Countries are similar except for frictions in their labor markets. We study the
interaction of labor market rigidities and trade impediments in shaping welfare, trade flows,
productivity, price levels and unemployment rates. We show that both countries gain from trade
but that the flexible country which has lower labor market frictions gains proportionately
more. A flexible labor market confers comparative advantage; the flexible country exports
differentiated products on net. A country bene
fits by lowering frictions in its labor market, but
this harms the countrys trade partner. And the simultaneous proportional lowering of labor
market frictions in both countries benefi
ts both of them. The model generates rich patterns
of unemployment. Specifi
cally, trade integration which bene
fits both countries may raise
their rates of unemployment. Moreover, differences in rates of unemployment do not necessarily
reflect differences in labor market rigidities; the rate of unemployment can be higher or lower
in the flexible country. Finally, we show that the flexible country has both higher total factor
productivity and a lower price level, which operates against the standard Balassa-Samuelson
e¤ect.
- Publication Type: WCFIA Working Paper
- Published Date: August 17, 2007
- Field of Interest: International Economics
- Helpman, Elhanan, and Oleg Itskhoki. "Labor Market Rigidities, Trade and Unemployment." Working Paper 2008-0044, Weatherhead Center for International Affairs, Harvard University, August 2007.
