Author(s):	Céline Carrère, Anja Grujovic, Frédéric Robert-Nicoud
Publication Date:	July 2015
Date Revised:	November 2019
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:	cepr.org/active/publications/discussion_papers/dp.php?dpno=10692

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.