Comparative advantage and equilibrium unemployment

We embed a model of the labour market with sector-specific search-and-matching frictions into a Ricardian model with a continuum of goods to show that trade reduces unemployment in countries with comparative advantage in sectors with more efficient labour markets and leads to higher unemployment in countries with comparative advantage in sectors with less efficient labour markets. We test this prediction in a panel dataset of 107 countries covering the period 1995–2009 and find that the data support this theoretical prediction. Our results also help reconcile the apparently contradicting evidence in the empirical literature on the impact of trade on unemployment.