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Unemployment with trade and firm heterogeneity
Author(s) -
Hung LiWen,
Peng ShinKun
Publication year - 2020
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12250
Subject(s) - economics , unemployment , welfare , free trade , wage , capital (architecture) , labour economics , international economics , macroeconomics , market economy , history , archaeology
Abstract By specifying the setting of the footloose capital model with firm heterogeneity, this paper examines the effects of trade liberalization on unemployment through two different mechanisms: firstly, we embed search frictions into the labor market; and secondly, we consider fair wages as the source of unemployment. In the model with search frictions, we find that both the expected wage and employment rate could be higher for a small country with better search technology. In the fair wage setting, the results show that an increase in trade freeness increases the unemployment rate of the large (small) country when the trade freeness is sufficiently high (low). Finally, we try to compare the welfare levels under different scenarios and discover that unemployment may lead to a deterioration in the welfare gains from trade.