Abstract
This paper analyses the labour market effects of trade liberalization, in a model where (a) labour demand uncertainty is higher in tradable industries, due to industry-specific shocks to world prices, and (b) the costs of inter-sectoral mobility are lower for skilled (i.e. educated) workers. We look at two cases: first, where labour markets are competitive and, second, where an unemployment subsidy creates rigidities. The results show an increase in the wage skill gap, a decline in the real wage and welfare of unskilled workers, and an expansion of inter-sectoral labour mobility and wage volatility. These effects are more pronounced in the case of competitive markets. Our results suggest that focusing on the traditional Stolper – Samuelson effect may underestimate the effects of international trade on labour markets.
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