Unemployment in an Interdependent World

us with a one-to-one mapping between labor market tightness and the stationary rate of

. = η

^Ul η + θ_fm[θ_i] *

Firm dynamics. Similarly, we require that the flow into the pool of operating firms is
equal to the flow out of this pool; hence, (1 — δ) (1 — G [.*i]) Mi^e = δM_i, where M_i^e is the
total mass of firms that attempt entry (and therefore pay the entry fee f^e).

2.5 Market clearing conditions

Labor market. The labor market clearing condition is given by L_i^e = (1 — u_i)L_i, where
L_i^e is aggregate employment and Li is labor supply in country i. The mass of active
domestic firms adjusts so that the labor market clears, hence

The market for the final output good. Total spending on the aggregate output
good, i.e., total nominal income, is defined as the sum of revenues generated by inter-
mediate goods producing firms from sales on the domestic and export markets. Using
the free entry condition given in equation (23), the expression for π_ij [.] given in equa-
tion (20), the definition for the ex ante probability of exporting to country j conditional
on successful entry Qi_j∙ = (1 — G [.*_j∙] )/(1 — G [.*i]), the distribution of workers across
markets Le = Mi ∑N=₁ QijL_ij [.i_j∙], and summing over all firms M_i, we may solve for
ΣN=1 MiQij Rij ^[.^]:

_e   PiMi                        r + δ _e η + r _e Pici

j=1 Mi^QijRij[φ] = wiLi + — ^(1 + r) ∑ ^Qij ^fij + 1 — g [.ɪi]^f + + — Li m-[θiɪ^,

which is the sum of payments to employed workers (aggregate consumption expenditure),
on flow fixed costs f_ij , on appropriately discounted up-front investments f^e , and on search
costs. Note that ∑_j∙=₁ QijRij[.] is equal to aggregate income in country i, denoted by Yi,
and also is equal to the value of final goods production.¹⁶

Input markets. Intermediate inputs are traded across countries. In equilibrium every
country maintains multilateral (though not bilateral) trade balance so that the total

¹⁶ Note that we assume that the final output good is non-traded. Alternatively, one could assume that
Y is freely tradable across countries. This choice would neither be more realistic, nor would it give rise
to major analytical simplifications. Additionally, the results are hardly affected by assuming a freely
tradable final good.

15

<<   14   15   16   17   18   19   20   >>

More intriguing information