Working Paper: NBER ID: w16662
Authors: Elhanan Helpman; Oleg Itskhoki; Stephen Redding
Abstract: 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.
Keywords: trade; labor market; inequality; unemployment; firm heterogeneity
JEL Codes: F12; F16; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reductions in labor market frictions (J48) | unemployment (J64) |
| reductions in labor market frictions (J48) | welfare (I38) |
| reductions in labor market frictions (J48) | unemployment (negative externality on trade partners) (F66) |
| unilateral labor market reforms (J48) | trade partners' unemployment (F10) |
| opening of trade (F19) | inequality (D63) |
| opening of trade (F19) | unemployment (J64) |
| opening of trade (F19) | welfare (I38) |
| unemployment benefits (J65) | distortions in labor markets (J79) |
| distribution of wages and employment across firms (J31) | wage inequality (J31) |