Entrepreneurs, Jobs, and Trade

We propose a simple theory of personal income distribution, equilibrium unemployment, and interindustry trade, in which product markets are perfectly competitive and labor markets exhibit search related frictions. Individuals, based on their managerial talent, choose to become self-employed entrepreneurs and acquire more managerial capital, or they become workers and face the prospect of unemployment. We analyze the effects of trade on a small-open jobless economy and a two-country global economy. In the case of a small-open economy, improvements in international competitiveness raise the possibility of immiserizing recessions with higher unemployment, lower GDP, and lower aggregate welfare. Reductions in the costs of acquiring managerial capital or appropriate job-vacancy subsidies generally lead to lower unemployment rate, higher aggregate welfare, and higher income inequality. In a two-country global economy, a country exports the good with lower labor-market frictions or lower costs of managerial capital acquisition. Unilateral job-creating policies have asymmetric effects on income inequality and unemployment across countries, and ambiguous effects on welfare in each country.