Globalization and Labor Market Outcomes Discussion

Outline Paper provides mechanism by which openness leads to lower unemployment Very serious paper – clever combination of two different literatures. Challenging task. Many innovations. Hard to understand. Explain basics of the model. Examine robustness of result.

Profits and value Profits and value of firm: – Revenues: R(q,Y) – Cost: c(w,  )q/  -- increasing function – Value of a firm: V(  w, ,Y)=  V(  c(w,  ),Y) Equilibrium free entry condition: E V(  c(w,  ),Y) = f E Pins down c(w,  Explains “separability” result: (thresholds independent of  E.g. an increase in vacancy cost c has no effect on these thresholds.

The main result A decrease in trade costs: – Increases expected value of firms – To restore zero profit condition, c(w,  must rise. – In Melitz, (no friction) all adjustment in w. – But here w is not free: e.g. if  w = b and all adjustment in  – Bargaining power of firms does not allow wage to rise enough. So  increases. – As  increases, rate of escape of U rises. Since rate of escape of E is exogenous, unemployment falls.

Main result: caveats Not obvious whether result extends to other search environments (e.g. models of directed search.) Not obvious what happens if rate of job destruction is endogenous. – Case of Markov shocks – Localized competition – Focus on predictions on unemployment duration Costs of vacancy, entry and fixed in terms of labor? Role of symmetry?

Conclusion Nice contribution Need to make the intuition more transparent Discuss robustness Focus on unemployment duration Other implications?