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International Trade and Unemployment: The Worker-Selection Effect

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International Trade and Unemployment

Part of the book series: Contributions to Economics ((CE))

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Abstract

The impact of trade liberalization on a country’s labor market situation is a core issue in modern trade theory. For a world with homogeneous firms, homogeneous workers and perfect competition on product and labor markets the mechanisms are well-known. However, for a world with heterogeneous firms, heterogeneous workers and imperfect competition, wage and employment effects are context-specific. Most prominent in the recent debate is Melitz (2003).

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Notes

  1. 1.

    The technology rules out a “love of variety”-index. This closes down the familiar channel, in which trade increases welfare because of external scale effects (see Krugman 1980; Melitz 2003) and allows us to find new insights concerning the trade–welfare relationship.

  2. 2.

    Note that (2.12) is an approximation, which holds for ρu = 0. For a justification of this simplifying assumption see Layard and Nickell (1990).

  3. 3.

    One might argue that high-skilled workers with a reservation wage above the wage paid by the representative firm are not affected by \(w(\widetilde{\phi })\). Consequently, \(w(\widetilde{\phi })\) should not be part of their outside option. However, in a Melitz-world with pareto-distributed productivities, the aggregate variables have the property that they are identical to what they would be if the economy were endowed with M identical firms with productivity \(\widetilde{\phi }\). Therefore, \(w(\widetilde{\phi })\) is only a shortcut for the “true” distribution of wages in the economy. A shift in \(w(\widetilde{\phi })\) should thus be interpreted as a proxy for a shift in the whole wage distribution affecting all wages irrespective of the skill-level.

  4. 4.

    “Active” means that these workers have a positive employment probability. Nevertheless, at any point in time a fraction of active workers is unemployed.

  5. 5.

    To ensure 0 ≤ u ≤ 1, we have to assume \({\Gamma }_{3} \cdot \widetilde{ {\phi }}^{\omega } \leq 1\), i.e., aggregate labor demand H must not exceed the number of active workers L. The higher the shape parameter k, the larger is the fraction of firms with an entrepreneurial productivity close to the cut off level, the larger is the fraction of firms with a relatively low minimum quality requirement, and the larger is the number of active workers. If k exceeds a well-defined threshold, the condition H < L is fulfilled (for a similar problem and solution see Egger and Kreickemeier 2009a).

  6. 6.

    We abstract from differences in country size, technologies etc. See Pflüger and Russek (2010) for a treatment of these asymmetries.

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Authors and Affiliations

  1. IAAEU & University of Trier, Trier, Germany

    Marco de Pinto

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de Pinto, M. (2013). International Trade and Unemployment: The Worker-Selection Effect. In: International Trade and Unemployment. Contributions to Economics. Physica, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-33236-4_2

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  • DOI: https://doi.org/10.1007/978-3-642-33236-4_2

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