The Labor Market Challenges of Globalization

While the effects of international trade on unemployment, and the ensuing consequences for inequality, feature prominently in public debates on the effects of globalization, they have long been neglected by research economists. In fact, international trade theory has, until recently, relied on long-run general equilibrium models in which fully flexible labor markets allow the economy to sustain full employment at all times. Only recently have economists begun to incorporate labor market imperfections into trade models.

This project contributes to the growing literature on the effects of international trade on unemployment and inequality. To do so, we integrate micro-funded models of unemployment into state-of-the-art international trade models. Having identified winners and losers of trade integration, we then study how labor market policies, such as hiring vouchers, low-wage subsidies, and training subsidies, can be used to alleviate the burden placed on workers in the globalization process. We evaluate the effectiveness of these labor market policies with respect to economic efficiency (absence of waste) and equity (redistribution).

Yet, globalization has not only elevated the importance of international trade. It has also increased cross-border movements of people and sparked a major policy debate on the labor effects of immigration in host countries. These labor market effects of immigration are the topic of the second strand of the project. More specifically, our research focuses on the wage, employment and welfare effects of immigration for natives. In the future, the project will also analyze how integration policies can foster the successful (economic) integration of migrants in host countries.