Within an open economy framework characterized by vertical linkages in production, and search frictions with two-sided heterogeneity in the labor market, raising trade barriers is shown to increase unemployment across skill levels and to reduce labor market participation and aggregate income. These effects are not necessarily moderated by maintaining frictionless mobility of capital across borders. We find that a flexicurity reform of a liberal welfare state can dampen the adverse effects of de-globalization.
Bibliographical noteWe are grateful to two anonymous referees and to the Editor of the Journal for very constructive suggestions. We would also like to thank Stephen Boyd, Nils Braakmann, Holger Görg, Sebastian Könings, Steve Matsus, Fredrik Sjöholm, John Skåtun, Allan Sørensen and participants at the NORFACE Welfare State Futures Programme Final Conference at the EUI in Fiesole and at the GlobLabWS final workshop in Aberdeen for useful comments. This work was supported by the NORFACE ERA-NET (New Opportunities for Research Funding Agency Co-operation in Europe Network) Welfare State Futures Programme, Grant Number 462-14-120. The usual disclaimer applies.
- welfare state