DP11540 On the heterogeneous effect of trade on unemployment

Author(s): Céline Carrère, Marco Fugazza, Marcelo Olarreaga, Frédéric Robert-Nicoud
Publication Date: September 2016
Keyword(s): search frictions, Trade, Unemployment
JEL(s): F10, F13, F16
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11540

We embed a model of the labor market with sector-specific search-and-matching frictions into a Ricardian model with a continuum of goods to show that trade reduces unemployment in countries with comparative advantage in sectors with more efficient labor markets and leads to higher unemployment in countries with comparative advantage in sectors with less efficient labor markets. We test this prediction in a panel dataset of 107 countries during the period 1995-2009 and find that the data supports the theoretical prediction. Our results also help reconciliate the apparently contradicting evidence in the empirical literature on the impact of trade on unemployment.