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Trade Shocks and Labor Adjustment: A Structural Empirical Approach

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  • Erhan Artuç
  • Shubham Chaudhuri
  • John McLaren

Abstract

The welfare effects of trade shocks turn on the nature and magnitude of the costs workers face in moving between sectors. Using an Euler-type equilibrium condition derived from a rational expectations model of dynamic labor adjustment, we estimate the mean and variance of workers' switching costs from the US CPS. We estimate high values of both parameters, implying slow adjustment of the economy and sharp movements in wages in response to trade shocks. However, import-competing workers can still benefit from tariff removal; liberalization lowers their wages in the short and long run but raises their option value.(JEL E24, F13, F16)

Suggested Citation

  • Erhan Artuç & Shubham Chaudhuri & John McLaren, 2010. "Trade Shocks and Labor Adjustment: A Structural Empirical Approach," American Economic Review, American Economic Association, vol. 100(3), pages 1008-1045, June.
    • Handle: RePEc:aea:aecrev:v:100:y:2010:i:3:p:1008-45
    Note: DOI: 10.1257/aer.100.3.1008
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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