Labor Markets and Kaleidoscopic Comparative Advantage

Capturing the notion of kaleidoscopic comparative advantage ( Bhagwati, 1998 ), we show that international trade increases the volatility of profitability. In this framework, we address the labor market implications of an increase in openness, when insurance and credit markets are imperfect. With kaleidoscopic comparative advantage, trade raises the likelihood of firm shutdown and worker displacement, which, in equilibrium, affects wage contracts. In a simple model, we analyze the consequences for wage levels, earnings volatility, job instability, and income distribution, of the openness of previously nontraded industries to international trade.