Trade Liberalization, Intra-Industry Reallocation of Labor and Trade Adjustment Assistance

Abstract

This paper analyzes how TAA for workers plays a role on intra-sectoral redistribution of labor in response to trade liberalization by placing Riordan and Staiger’s (1993) TAA model within Melitz’s (2003) framework of international trade with heterogeneous monopolistically competitive firms. Due to the existence of asymmetric information of worker quality between firms and workers, high-productivity firms abstain from rehiring workers laid-off from low-productivity firms when the average quality of those workers is relatively low. Hence a job training program of TAA can have an important role in reducing unemployment and income deterioration in low productivity firms, and raise efficiency in high-productivity firms within a sector in response to trade liberalization. In addition, the job training program is more necessary with respect to the process of intra-redistribution of production factors when trade opens at a low level, and also when a sector has comparative advantage, skill-intensive technology and a large portion of low quality labor in the labor market.