A Quantitative Trade Model with Unemployment

Abstract

This paper emphasizes the role of labor market frictions, which is largely neglected in quantitative trade models that usually assume full-employment. Labor market frictions can contribute to a source of comparative advantage, thus affecting trade share, price, expenditure, etc. Unemployment and changes in unemployment rates play a key role in the calculation of changes in welfare. This paper highlights that quantitative trade models with full-employment can provide biased welfare effects from tariff changes relative to the present model with labor market frictions.