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Trade Reform and Labor Market Dynamics

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Author Info

  • Dennis P.J. Botman

    (University of Amsterdam)

  • Alexander F. Tieman

    ()
    (Vrije Universiteit Amsterdam)

Abstract

We present an equilibrium-search model with heterogenous workers whosearch for a job in one of two sectors and who lose part of theirskills during unemployment. We show that an import tariff increasethe wage and the employment prospects in the protected sector. Thisresults in a labor market distortion because it changes thecomparative advantage of the least specialised workers. Trade reformresults in sectoral reallocation of workers which affects employmentin both sectors through quantity and quality effects and increasesunemployment persistently. Replacing the tariff by a wage-costsubsidy financed by means of lump-sum taxation prevents unemploymentfrom rising after trade has been reformed. However, giving a wage-cost subsidy to both sectors is cheapersince then comparative advantage of workers will no longer bedistorted, although unemployment will temporarily rise.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 99-054/1.

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Date of creation: 05 Aug 1999
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Handle: RePEc:dgr:uvatin:19990054

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Web page: http://www.tinbergen.nl

Related research

Keywords: Equilibirum-Search model; Comparative Advantage; Trade Reform; Spillovers; Persistence; Subsidies;

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  1. Abraham, Katharine G. & Katz, Lawrence F., 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Scholarly Articles 3442781, Harvard University Department of Economics.
  2. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, January.
  3. Lilien, David M, 1982. "Sectoral Shifts and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 90(4), pages 777-93, August.
  4. Rui Albuquerque & Sergio Rebelo, 1998. "On the Dynamics of Trade Reform," NBER Working Papers 6700, National Bureau of Economic Research, Inc.
  5. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  6. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  7. Caplin, Andrew & Leahy, John V, 1993. "Sectoral Shocks, Learning, and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 777-94, October.
  8. Boyan Jovanovic & Robert Moffitt, 1990. "An Estimate of a Sectoral Model of Labor Mobility," NBER Working Papers 3227, National Bureau of Economic Research, Inc.
  9. Buffie, Edward F., 1984. "The macroeconomics of trade liberalization," Journal of International Economics, Elsevier, vol. 17(1-2), pages 121-137, August.
  10. Heckman, James J & Honore, Bo E, 1990. "The Empirical Content of the Roy Model," Econometrica, Econometric Society, vol. 58(5), pages 1121-49, September.
  11. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
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