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Patterns of Labour Market Adjustment to Trade Shocks with Imperfect Capital Mobility

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  • Erhan Artuc
  • Irene Brambilla
  • Guido Porto

Abstract

We explore how different investment frictions affect the patterns of responses of labour markets to tariff cuts. To investigate these patterns, we formulate a multi-sector dynamic model featuring capital and labour adjustment costs that we fit to Argentine data. Using counterfactual simulations of a tariff decline in the textile sector, we show that capital adjustment can create long-run responses of real wages that are larger than the short-run responses. This happens as textile firms disinvest during the transition. We also show that the reduction of tariffs on capital inputs boosts investment and real wages across sectors.

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  • Erhan Artuc & Irene Brambilla & Guido Porto, 2022. "Patterns of Labour Market Adjustment to Trade Shocks with Imperfect Capital Mobility," The Economic Journal, Royal Economic Society, vol. 132(646), pages 2048-2074.
    • Handle: RePEc:oup:econjl:v:132:y:2022:i:646:p:2048-2074.
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