Saving Good Jobs under Global Competition by Rewarding Quality and Efforts

This paper links firms’ endogenous quality choice to worker effort and efficiency wages. The model generates two distinct features: effort is rewarded and quality is rewarded. Then firms with higher monitoring accuracy produce higher quality and pay higher wages. When trade is opened, while bad jobs with low wages and low rents are destroyed, good jobs are created. Nevertheless, unemployment can either rise or fall and wage polarization can arise, depending on the structure of monitoring cost and on the share of exporting firms. These results contrast sharply with the literature, and are consistent with empirical evidence.