International Trade and Labor Markets

During the past two decades, the economic fortunes of less-skilled workers in the United States and Europe have sunk at a time when there has been a boom in international trade. This has sparked considerable debate among those interested in trade policy and labor markets over the impact of trade on labor-market outcomes, and in particular, the impact of globalization on low-skill, low-wage workers. Davidson and Matusz tackle these questions by extending the traditional analysis of international trade to allow for labor markets characterized by workers whose labor-market experiences are punctuated by spells of involuntary unemployment. They demonstrate that such extensions are easily accomplished and that they provide valuable new insights that withstand empirical scrutiny. And perhaps most importantly, argue Davidson and Matusz, such models offer the appropriate venue in which to carry out policy analysis aimed at determining the best way to compensate those who suffer economic loss as a result of changing trade patterns.