Job-Searching and Job-Matching in a Two-Sector General Equilibrium Model

We extend the benchmark model of DMP in a two-sector general equilibrium framework by introducing a frictionless segment of the labour market. We also examine the effects of trade reforms and labour market reforms on equilibrium rate of unemployment and wage inequality in our stylitzed economy. We find that both these reforms reduce equilibrium rate of unemployment. However, trade reforms raise wage inequality but labour market reforms reduce it. These results provide a strong theoretical basis for labour market reform in a small open economy characterized by frictional labour market.