Adjusting to Trade Liberalization: Reallocation and Labor Market Policies

Labor market responses to trade liberalization typically exhibit a slow reallocation of labor across industries, large costs for displaced workers, and a disproportionate adjustment burden for older workers. To explain these features and analyze alternative policies, I develop a two-sector small open economy model with overlapping generations, frictional labor markets, and sector-specific human capital. Calibrated to Brazilian data, the quantitative model shows that search frictions alone cannot explain the sluggishness of adjustment. The model also helps to compare the distributional and efficiency effects of alternative worker-assistance programs and contributes to a better understanding of trade-induced transitional dynamics.