A BEHAVIORAL MODEL OF UNEMPLOYMENT, SOCIOTROPIC CONCERNS, AND THE POLITICAL ECONOMY OF TRADE POLICY CARL DAVIDSON*, STEVEN J. MATUSZ AND DOUGLAS NELSON We present a behavioral model in which agents are concerned about the scarring effects from unemployment for themselves and others and explore the manner in which unemployment matters for trade policy. We derive three policy implications: the government has an incentive to increase employment in sectors characterized by “good jobs,” where the good job/bad job characterization depends on an industry’s job creation and destruction rates; the government has an incentive to pursue this policy in a gradual fashion by channeling new and unemployed workers into the appropriate sector; and opposition to trade liberalization can be reduced by welfare state policies. Customs tariffs which implied profits for capitalist and wages for workers meant, ulti- mately, security against unemployment, stabilization of regional conditions, assurance against liquidation of industries and, perhaps most of all, the avoidance of that painful loss of status which inevitably accompanies transference to a job at which a man is less skilled and experienced than at his own. (Polanyi, 1944) When economists think about the labor market effects of trade, we think about wages; when everyone else thinks about the labor market effects of trade, they think about jobs. Thinking in terms of wages, especially as represented by generalizations of the Stolper–Samuelson theorem as embodied in the mandated wage regression approach, we have pretty much convinced ourselves that trade is essentially irrelevant to labor markets (Slaughter, 2000). Unfortunately, this framework has nothing to say about jobs. 1 This is particularly problematic when it comes to the positive analysis of trade policy, where there is little direct evidence that relative wage effects matter at all and considerable evidence that unemployment matters a great deal. 2 Thus, in this article, we build on earlier work that analyzes the link between trade and unemployment to provide a new analysis of trade policy and unemployment. Our main goal is to draw on recent work in behavioral economics in order to exam- ine the implications of unemployment for the design of trade policies. Specifically, we argue that, in addition to affecting individual wellbeing, unemployment plays a central role in citizen evaluation of government performance. The economic and psychological foundations for this centrality are obvious from introspection and increasingly sup- ported by empirical research. Most obviously, it should be clear that unemployment *Corresponding author: Carl Davidson, Department of Economics, 110 Marshall-Adams Hall, Michigan State University, East Lansing, MI 48824, USA. E-mail: davidso4@msu.edu 1 Not only is it the case that full employment is an equilibrium condition, but in the even case (i.e., the number of factors is equal to the number of goods) that is generally deployed, the zero profit conditions, from which the Stolper–Samuelson theorem is derived, are separable from the full employment conditions. 2 We discuss the evidence supporting this below, but the basic fact is that unemployment variables are always significant in macro tariff regressions. In addition, the public opinion data, which are often taken as providing evidence supporting a significant role for relative price effects (e.g., Slaughter, 2000), are ambigu- ous in this regard, while it is widely agreed that framing questions in terms of unemployment has the effect of increasing protectionist sentiment significantly (Hiscox, 2006; Scheve and Slaughter, 2001a, 2001b). © 2012 Blackwell Publishing Ltd 72 ECONOMICS & POLITICS DOI: 10.1111/j.1468-0343.2011.00393.x Volume 24 March 2012 No. 1