Fears of rising wage inequality and job loss loom large in current debates on free trade. Surprisingly, however, there exists
little academic research on how to compensate those who lose from free trade. This policy paper reviews the existing theoretical
literature on trade and compensation, and derives guidelines on how to design compensation schemes in practice. The existing
theoretical literature suggests that active labour market policies, targeted to workers who lose from free trade, are a promising
way of compensation. In line with this theoretical recommendation, we find that countries open to free trade also spend more
on active labour market policies.
Forschungsbereich:Makroökonomie und europäische Wirtschaftspolitik