A Note on 'Jobs, Jobs, Jobs: A 'New' Perspective on Protectionism' of Costinot (2009)

Abstract

In this paper, I re-investigate Costinot (2009) in a more general parameter space. The key insight of this paper is that the reason a small open economy uses trade protections is not because of the existence of search frictions in the labor markets, but the real motivation is from labor market inefficiency. I show that the restricted parameter space considered in Costinot (2009) generates an equilibrium with inefficiently high unemployment compared to the constrained-efficient level of unemployment, and thus trade protections can improve welfare. In the more general parameter space considered in this paper, despite the existence of search frictions in a labor market, free trade can be optimal if the labor market is efficient. In addition, unemployment can be inefficiently low and an import subsidy is preferable. The result holds true for a large class of commonly used matching functions.