Abstract

The public opinion about the consequences of globalization is rather critical. The main concern is that international trade leads to a destruction of domestic jobs and an increase in unemployment. Recent academic research points out that unemployment effects are only one channel through which trade impacts the efficiency of labor allocation in modern societies. Another source of inefficiency that has recently featured prominently on the research agenda of economists is the mismatch of worker-specific abilities and task-specific skill requirements due to imperfections in the firm-internal worker-task assignment process. The efficiency losses from this imperfection can be significant, and hence firms are willing to spend a significant amount of resources to improve their internal organization of labor. Of course, the scope for such investments differs and it is intuitive that larger, more productive firms end up having a more efficient internal labor allocation process – which further increases ex ante differences in firm profitability. Shedding light on incentives of firms to invest into their internal labor allocation process and studying the consequences of openness for the mismatch between worker-specific abilities and task-specific skill requirements are the two main objectives of this project. We thereby develop a new theoretical vehicle that allows us to study the interaction of unemployment due to search frictions and the firm-internal mismatch between worker-specific abilities and firm-specific skill requirements as two important sources of underemployment. We use this framework to show how exporting alters a firm’s preferred pattern of labor organization and investigate how international trade affects the relative importance of firm-external search frictions and firm-internal worker-task mismatch in determining economy-wide underemployment. We also use the theoretical vehicle as guidance for empirical research and structurally estimate the model to obtain consistent estimates of its main parameters and to assess its predictive power. For the empirical exercise, we use a linked-employer-employee data-set provided by the IAB Institute for Employment Research, which provides detailed information on workers and establishments in Germany for the period 1993-2008. With the parameter estimates at hand, we finally calibrate our model to quantify the relative size of the two sources of underemployment. We also use the calibrated model to conduct counterfactual analysis in order to quantify the impact of trade on the efficiency of firm-internal and firm-external labor markets and to study the implications of policy intervention on underemployment in the open economy.