Incorporating Unemployment into the GTAP Model

Abstract

This paper documents the development of a labor module that incorporates job-search frictions, to introduce unemployment into the standard GTAP model. In this approach, unemployed individuals must search for a job opening and firms that want to hire must search for a worker to fill the job. To illustrate the potential value of a GTAP model with frictional unemployment, the impacts of a 25 percent increase in U.S. tariffs on metal products (e.g., ferrous and non-ferrous metals) are simulated. While employment of skilled and unskilled labor increases in the U.S. metals sector, employment of both types of labor declines in U.S. manufacturing and services sectors. These decreases in employment offset the increase in the metals sector, leading to a 0.8 percent increase in the unemployment of unskilled labor and a 1.5 percent in the unemployment of skilled labor. These increases would translate to a 0.1 percent point increase in the unemployment rate in the U.S. labor market. A potential barrier to wider use of a the GTAP model with unemployment is the availability of job separation or turnover rate data in regions other than the United States. In the example simulation, job turnover rates, and thus the initial levels of matched labor in the non-U.S. regions are assumed to be the same as for United States.