The Welfare Effects of Trade With Labour Market Risk

This paper evaluates the welfare effects of trade in a setting with risk averse workers and uncertainty in labour market outcomes. We provide conditions under which a small change in relative prices due to trade reduces welfare in both a static as well as a dynamic economy. Finally, we develop a quantitative model to examine the effect of large price changes due to trade and show that for a realistic calibration that gains from trade exist for reasonable changes in relative prices but the gains are smaller than in a world with risk neutral individuals