International Trade and Unemployment – the Worker-Selection Effect
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Abstract
This paper analyzes how trade liberalization influences the unemploy-
ment rate of workers with di¤erent abilities. We refine the Melitz (2003)
framework to account for trade unions and heterogeneous workers, who
di¤er with respect to their abilities. Our main findings are: (i) high-
ability workers profit from trade liberalization in terms of higher wages
and higher employment; (ii) the least efficient workers loose their job
and switch to long-term unemployment (worker-selection effect); (iii) if a
country is endowed with a large fraction of low-skilled workers, trade lib-
eralization leads to a rise in aggregate unemployment. In this case, trade liberalization may harm a country's welfare.
Keywords
trade liberalization, trade unions, skill-speci…c unemploy- ment