DP10692 Trade and frictional unemployment in the global economy

Author(s): Céline Carrère, Anja Grujovic, Frédéric Robert-Nicoud
Publication Date: July 2015
Keyword(s): labor market frictions, trade, unemployment
JEL(s): F15, F16, F17
Programme Areas: Labour Economics, International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=10692

We develop a multi-country, multi-sector trade model with labor market frictions and structural equilibrium unemployment. Trade opening leads to a reduction in unemployment if it raises real wages and reallocates labor towards sectors with lower-than-average labor market frictions. We estimate sector-specific labor market frictions from 25 OECD countries and the trade parameters of the model using worldwide trade data. We then quantify the potential unemployment and real wage effects of implementing the Transatlantic Trade and Investment Partnership (TTIP) or the Trans-Pacific Partnership (TPP), and of eliminating trade imbalances worldwide. The unemployment and real wage effects sometimes work in opposite directions for some countries, such as the US under TTIP. We introduce a welfare criterion that accounts for both effects and splits such ties. Accordingly, US welfare is predicted to decrease under TTIP.