This paper develops a new framework for examining the distributional consequences of trade liberalization that is consistent with increasing inequality in every country, growth in residual wage inequality, rising unemployment, and reallocation within and between industries. While the opening of trade yields welfare gains, unemployment and inequality within sectors are higher in the trade equilibrium than in the closed economy. In the open economy changes in trade openness have nonmonotonic effects on unemployment and inequality within sectors. As aggregate unemployment and inequality have within- and between-sector components, changes in sector composition following the opening of trade complicate its impact on aggregate unemployment and inequality. However, when countries are nearly symmetric, the sectoral composition effects reinforce the within-sector effects, and both aggregate inequality and aggregate unemployment rise with trade liberalization.

The welfare effects of trade shocks depend crucially on the nature and magnitude of the costs workers face in moving between sectors. The existing trade literature does not directly address this, assuming perfect mobility or complete immobility, or adopting reduced-form approaches to estimation. We present a model of dynamic labor adjustment that does, and is, moreover, consistent with a key empirical fact: that intersectoral gross flows greatly exceed net flows. Using an Euler-type equilibrium condition, we estimate the mean and the variance of workers ’ switching costs from the U.S. March Current Population Surveys. We estimate high values of both parameters, implying both slow adjustment of the economy, and sharp movements in wages, in response to a trade shock. However, it is possible that workers in import-competing industries benefit from the removal of tariff protection; liberalization lowers their wages in the short run and the long run, but raises their option value.

Although it is commonly believed that trade liberalization results in higher GDP, little is known about its effects on poverty and inequality. This paper uses the sharp trade liberalization in India in 1991, spurred to a large extent by external factors, to measure the causal impact of trade liberalization on poverty and inequality in districts in India. Variation in preliberalization industrial composition across districts in India and the variation in the degree of liberalization across industries allow for a difference-in-difference approach, establishing whether certain areas benefited more from, or bore a disproportionate share of the burden of liberalization. In rural districts where industries more exposed to liberalization were concentrated, poverty incidence and depth decreased by less as a result of trade liberalization, a setback of about 15 percent of India’s progress in poverty reduction over the 1990s. The results are robust to pre-reform trends, convergence and time-varying effects of initial district-specific characteristics. Inequality was unaffected in the sample of all Indian states in both urban and rural areas. The findings are related to the extremely limited mobility of factors across regions and industries in India. Indeed, in Indian states where inflexible labor laws impeded factor reallocation, the adverse impact of liberalization on poverty was more pronounced. The findings, consistent with a specific factors model of trade, suggest that to minimize the social costs of inequality, additional policies may be needed to redistribute some of the gains of liberalization from winners to those who do not benefit as much. Creating a flexible institutional environment will likely minimize the need for additional interventions. 1

As Latin American countries have become more open, their job turnover rates have risen, their informal sectors have become larger, and their wage distributions have become less equal. We develop a dynamic general equilibrium trade model that explains these phenomena. The model combines standard search frictions in labor markets with heterogeneous firms that experience ongoing productivity shocks. Each period, firms decide whether to exit or continue producing. Those firms that remain active choose their export volumes and adjust their employment levels through vacancy postings or lay-offs. Openness matters in our model because it makes profits more sensitive to productivty shocks, as Rodrik (1997) argued. Thus when trade barriers are low, firms drawing negative shocks shed labor relatively rapidly (and perhaps exit), while firms drawing positive shocks acquire new workers relatively rapidly. Further,

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Is the pattern of trade correlated with cross-sector differences in job turnover? Theoretically, cross-sector differences in turnover give rise to compensating wage differentials, which feed through to output prices. Cross-country differences in turnover are an independent factor in determining comparative advantage. Using two different data sets on turnover, we find strong evidence that normalized U.S. net exports by sector are negatively correlated with job destruction and worker separation rates. Weaker evidence suggests a positive correlation with between normalized net exports and job acquisition. Using sector-specific job destruction data for both Canada and the U.S., we find confirmation of the theoretical prediction that normalized net exports to Canada are negatively related to the ratio of the U.S. job destruction rate to the Canadian job destruction rate. We owe a great debt to numerous people who provided us with many detailed and thoughtful comments at various

This paper studies the link between volatility, labor market flexibility, and international trade. International differences in labor market regulations affect how firms can adjust to idiosyncratic shocks. These institutional differences interact with sector specific differences in volatility (the variance of the firm-specific shocks in a sector) to generate a new source of comparative advantage. Other things equal, countries with more flexible labor markets specialize in sectors with higher volatility. Empirical evidence for a large sample of countries strongly supports this theory: the exports of countries with more flexible labor markets are biased towards high-volatility sectors. We show how differences in labor market institutions can be parsimoniously integrated into the workhorse model of Ricardian comparative advantage of Dornbusch, Fischer, and Samuelson (1977). We also show how our model can be extended to multiple factors of production.

We present a model of trade and search-induced unemployment, where trade results from Heckscher-Ohlin (H-O) and/or Ricardian comparative advantage. Using cross-country data on trade policy, unemployment, and various controls, and controlling for endogeneity and measurement-error problems, we find fairly strong and robust evidence for the Ricardian prediction that unemployment and trade openness are negatively related. This effect dominates the positive H-O effect of trade openness on unemployment for capital-abundant countries, which turns negative for labor-abundant countries. Using panel data, we find an unemployment-increasing short-run impact of trade liberalization, followed by an unemployment-reducing effect leading to the new steady state.

I study trade-induced transitional dynamics by estimating a structural dynamic equilibrium model of the Brazilian labor market. The model features a multi-sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector-speci c experience and costly switching of sectors. The model's estimates yield median costs of mobility ranging from 1.4 to 2.7 times annual average wages, but a high dispersion across the population. In addition, sector-speci c experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model for counter-factual trade liberalization experiments, the main ndings are: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are signi cantly mitigated due to the delayed adjustment; (3) trade-induced welfare e ects depend on initial sector of employment and on worker demographics. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of capital.

Exporting firms are larger and more productive than non-exporting firms. Trade openness leads to an increase in intra-industry firm turnover. As trade is liberalized, large firms need more labor to produce and small firms exit, leading to a reallocation of labor from the former to the latter. This mech-anism leads to welfare gains as aggregate productivity is increased. This paper identifies another consequence of this transmission channel when labor market search frictions are introduced. I merge the Melitz (2003) model of intra-industry reallocations with the large firm model from Pissarides (2000) and do comparative statics on the level of employment. I find that higher trade exposure is associated with a lower level of employment, suggesting that trade generates more job destruction than creation. This result is due to interactions between goods and labor market imperfections. Finally I test the model predictions by applying GMM panel data methods to US sectoral job flows. The empirical findings confirm the theoretical results.