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Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity

  • Felbermayr, Gabriel
  • Prat, Julien
  • Schmerer, Hans-Jörg

We introduce search unemployment into Melitz’s trade model. Firms’ monopoly power on product markets leads to strategic wage bargaining. Solving for the symmetric equilibrium we show that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves average productivity. We show that this condition is likely to be met by a reduction in variable trade costs or by entry of new trading countries. Calibrating the model shows that the long-run impact of trade openness on the rate of unemployment is negative and quantitatively significant.

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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 20471.

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Date of creation: 2011
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Publication status: Published in Journal of Economic Theory 1 146(2011): pp. 39-73
Handle: RePEc:lmu:muenar:20471
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