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CEP discussion paper
Trade and Labor Market Outcomes
Elhanan Helpman, Oleg Itskhoki and Stephen Redding
December 2010
Paper No' CEPDP1028:
Full Paper (pdf)

JEL Classification: F12; F16; J64

Tags: inequality; unemployment; trade; labour market policy

This paper reviews a new framework for analyzing the interrelationship between inequality, unemployment, labor market frictions, and foreign trade. This framework emphasizes firm heterogeneity and search and matching frictions in labor markets. It implies that the opening of trade may raise inequality and unemployment, but always raises welfare. Unilateral reductions in labor market frictions increase a country’s welfare, can raise or reduce its unemployment rate, yet always hurt the country’s trade partner. Unemployment benefits can alleviate the distortions in a country’s labor market in some cases but not in others, but they can never implement the constrained Pareto optimal allocation. We characterize the set of optimal policies, which require interventions in product and labor markets.