Three essays on labor market frictions, international trade, and uncertainty

The labor market is a central institution in any modern economy. At the same time, the labor market is characterized by pervasive regulation. Across nations, the labor market is subject to minimum wages, hiring and firing restrictions, compulsory collective bargaining, etc. A recent and growing literature investigates the consequences of such heterogeneity in labor market institutions, studying how labor market rigidities affect the causes and consequences of policy changes. Thus far, however, few works have addressed the implications of labor market rigidities for trade-induced labor dynamics focusing on the informal sector, or the second moment shocks in an open economy setting. Important questions remain open for researchers and policymakers. The purpose of this thesis is to address these questions, studying the role of labor market frictions and its interaction with international trade and uncertainty.The first chapter investigates the impact of uncertainty shocks in a small open economy with search and matching frictions and firm entry. We first develop our empirical analysis in the context of the Korean economy, as all dimensions of the model are relevant in this country. An increase in uncertainty lowers output, consumption, investment and job finding rate, while raising unemployment and job separations. We also supplement the existing empirical evidence by looking at firm dynamics, real exchange rate and current account behavior. In our theoretical framework, we illustrate new transmissions mechanism that are ignored in the literature. Economic mechanisms go beyond the simple addition of each feature. Search frictions, firm entry and the open economy dimension actually strongly interact to amplify the effects of uncertainty shocks and make the model consistent with the empirical evidence.The second chapter studies how tax reforms help ensure a fair globalization. In this paper we develop a two-area model: a developed and an emerging country. The two areas differ according to the size of the informal sector, which is characterized by a more flexible labor market and lower productivity. Our analysis suggests that trade liberalization boosts economic activity and employment in both the formal and informal sector. However, this employment expansion is biased toward the informal sector, which is not subject to labor regulation and hence more flexible. Hence, trade liberalization leads to lower employment quality, as informal workers are not covered by the labor legislation, social security and receive lower paid. A budget-neutral tax reform switching the tax burden from payroll taxes paid by firms operating in the formal sector to a consumption tax may represent a strategy to support the formal sector. However, formalization comes at the cost of widening income inequality between formal and informal workers.The third chapter assesses the importance of labor market institutions in the transmission of uncertainty shocks to labor markets. Using country-specific VARs across OECD countries, I find that there is substantial cross-country heterogeneity in the responses of unemployment rates to uncertainty shocks. I also provide evidence that this heterogeneity can be attributed to differential employment protection legislation (EPL). Low EPL countries suffer more severe rises in unemployment compared to high EPL countries following uncertainty shocks. Stricter EPL mutes the reaction of unemployment, making it more costly to lay workers off. Moreover, the second moment shock reinforces this mechanism through the real options channel. Under irreversibility and uncertainty, firing costs come with a bigger cost. On the other hand, the role of other labor market characteristics is ambiguous.