Export and the Labor Market: a Dynamic Model with on-the-job Search

This paper develops a two-sector, two-factor trade model with labor
market frictions in which workers search for a job also when they
are employed. On the job search (OJS) is a key ingredient to
explain the response to trade liberalization of sectoral
employment, unemployment and wage inequality. OJS generates wage
dispersion and it leads to a reallocation of workers from less
productive firms that pay lower wages to more productive ones.
Following a trade liberalization the traditional selection effects
are more severe than without OJS and the tradable sector
experiences a loss of employment, while the opposite is true for
the non tradable sector. Starting from autarky, the opening to
trade has a positive effect on employment but it increases wage
inequality. For an already open economy, a further increase of
trade openness can, however, lead to an increase of unemployment.
The dynamics of labor market variables is obtained in closed form.
The model predicts overshooting at the time of implementation of a
trade liberalization, then the paths of adjustment follow a stable
transitional dynamics.