We present an equilibrium-search model with heterogenous workers who search for a job in one of two sectors and who lose part of their skills during unemployment. We show that an import tariff increase the wage and the employment prospects in the protected sector. This results in a labor market distortion because it changes the comparative advantage of the least specialised workers. Trade reform results in sectoral reallocation of workers which affects employment in both sectors through quantity and quality effects and increases unemployment persistently. Replacing the tariff by a wage-cost subsidy financed by means of lump-sum taxation prevents unemployment from rising after trade has been reformed. However, giving a wage- cost subsidy to both sectors is cheaper since then comparative advantage of workers will no longer be distorted, although unemployment will temporarily rise.
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