Trade and unemployment

Carl Davidson and Steven Matusz

Chapter 42 in Elgar Encyclopedia of International Trade, 2026, pp 218-220 from Edward Elgar Publishing

Abstract: International trade theory long assumed frictionless labor markets, precluding any meaningful connection between trade and unemployment. However, this assumption is at odds with public concern over globalization's effects on jobs. This entry surveys how general-equilibrium models have evolved to incorporate labor-market imperfections—specifically, search and matching frictions, as well as fair wage and efficiency wage models. We discuss how trade motivated by either comparative advantage or product variety can alter the natural rate of unemployment. Moreover, trade may affect adjustment costs, job search incentives, and sectoral labor mobility. Although empirical studies remain limited, the weight of evidence suggests that greater openness is associated with lower long-run unemployment, albeit with short-run disruptions. Modeling unemployment also reveals new mechanisms through which trade affects inequality and policy preferences.

Keywords: International trade; Unemployment; Labor market frictions; Comparative advantage; Trade openness; Job displacement (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035327492
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