Trade liberalization, unemployment, and inequality with endogenous job destruction

Abstract

In a two sector extension of the Mortensen–Pissarides model of endogenous job destruction, it is shown that trade liberalization increases both job creation and job destruction in the import competing sector and reduces them in the export sector. Since trade liberalization increases unemployment in the import competing sector and reduces it in the export sector, the impact on economy wide unemployment is ambiguous. While job destruction increases upon impact in the import competing sector, there is no immediate decrease in job destruction in the export sector leading to short term spikes in the net job destruction and unemployment rates in response to trade liberalization. Trade liberalization increases intersectoral wage inequality, however, intra-sectoral wage inequality increases in the export sector but decreases in the import competing sector. Finally, a more generous unemployment benefit increases the responsiveness of job destruction to trade liberalization.