Chapter 34 The labor market implications of international trade

The general equilibrium analysis of many important labor market issues is very different in an economy that is open to international trade than an economy (like the US in the 1950s) in which trade is not very important. Despite the fact that individual national economies have become increasingly interdependent over the last few decades, labor economists have generally used a closed economy framework to attack many important issues (such as the determinants of the distribution of earnings) that should, in fact, be approached very differently in an open economy setting. A major task of this paper is the exposition of the correct approach to labor market analysis for the case in which the focus economy is open rather than closed. Perhaps the most important implication of neoclassical trade theory for labor economics is that, under certain conditions, the skill distribution of wages in a particular economy is unaffected by the skill distribution of the supply of labor in that economy. Our review of the trade literature focuses on the question of the degree to which these conditions are likely to be satisfied. Our general conclusion — inspired more from the empirical than the purely theoretical branch of the trade field — is that the correct specification of the behavior of the labor market is a blend of the closed and open models.