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Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage

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Alejandro Cuñat
Marc J. Melitz

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Abstract

This paper studies the link between volatility, labor market flexibility, and international trade.International differences in labor market regulations affect how firms can adjust to idiosyncraticshocks. These institutional differences interact with sector specific differences in volatility (thevariance of the firm-specific shocks in a sector) to generate a new source of comparative advantage.Other things equal, countries with more flexible labor markets specialize in sectors with highervolatility. Empirical evidence for a large sample of countries strongly supports this theory: the exportsof countries with more flexible labor markets are biased towards high-volatility sectors. We show howdifferences in labor market institutions can be parsimoniously integrated into the workhorse model ofRicardian comparative advantage of Dornbush, Fisher and Samuelson (1977). We also show how ourmodel can be extended to multiple factors of production.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0799.

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Date of creation: Jun 2007
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Handle: RePEc:cep:cepdps:dp0799

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Keywords: comparative advantage;

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F1 - International Economics - - Trade

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Baldwin, Robert E, 1979. "Determinants of Trade and Foreign Investment: Further Evidence," The Review of Economics and Statistics, MIT Press, vol. 61(1), pages 40-48, February. [Downloadable!] (restricted)
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  5. Andrei A. Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund. [Downloadable!]
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  7. Davis, Donald R., 1998. "Technology, unemployment, and relative wages in a global economy," European Economic Review, Elsevier, vol. 42(9), pages 1613-1633, November. [Downloadable!] (restricted)
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  8. Andrew B. Bernard & Stephen J. Redding & Peter K. Schott, 2007. "Comparative Advantage and Heterogeneous Firms," Review of Economic Studies, Blackwell Publishing, vol. 74(1), pages 31-66, 01. [Downloadable!] (restricted)
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  9. Davis, Donald R, 1998. "Does European Unemployment Prop Up American Wages? National Labor Markets and Global Trade," American Economic Review, American Economic Association, vol. 88(3), pages 478-94, June. [Downloadable!] (restricted)
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  19. Juan Botero & Simeon Djankov & Rafael Porta & Florencio C. Lopez-De-Silanes, 2004. "The Regulation of Labor," The Quarterly Journal of Economics, MIT Press, vol. 119(4), pages 1339-1382, November. [Downloadable!] (restricted)
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    • Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Juan Botero, 2003. "The Regulation of Labor," NBER Working Papers 9756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Richard E. Baldwin & Frédéric Robert-Nicoud, 2007. "Protection for Sale Made Easy," CEP Discussion Papers dp0800, Centre for Economic Performance, LSE. [Downloadable!]
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  2. Nicholas Oulton, 2007. "Jeremy Greenwood and Per Krusell, "Growth Accounting with Investment-Specific Technological Progress: A Discussion of Two Approaches" A Rejoinder," CEP Discussion Papers dp0802, Centre for Economic Performance, LSE. [Downloadable!]
  3. Marianna Belloc & Samuel Bowles, 2009. "International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Jiandong Ju & Shang-Jin Wei, 2007. "Current Account Adjustment: Some New Theory and Evidence," NBER Working Papers 13388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Michelacci, Claudio & Schivardi, Fabiano, 2008. "Does Idiosyncratic Business Risk Matter?," CEPR Discussion Papers 6910, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Luis Araujo & Emanuel Ornelas, 2007. "Trust-Based Trade," CEP Discussion Papers dp0820, Centre for Economic Performance, LSE. [Downloadable!]
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  7. Chris Heaton & Paul Oslington, 2006. "Micro Vs Macro Explanations of Post-War US Unemployment Movements," Research Papers 0604, Macquarie University, Department of Economics. [Downloadable!]
  8. David Clark & Martin Knapp & Richard Layard & Guy Mayraz, 2007. "Cost-Benefit Analysis of Psychological Therapy," CEP Discussion Papers dp0829, Centre for Economic Performance, LSE. [Downloadable!]
  9. Marc-Andreas Muendler, 2007. "Labor Reallocation in Response to Trade Reform," University of California at San Diego, Economics Working Paper Series 2007-02, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  10. Markus Poschke, 2007. "Employment Protection, Firm Selection, and Growth," IZA Discussion Papers 3164, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  11. Eran Yashiv, 2007. "The Beveridge Curve," CEP Discussion Papers dp0807, Centre for Economic Performance, LSE. [Downloadable!]
  12. Yann Duval & Chorthip Utoktham, 2009. "Behind the Border Trade Facilitation in Asia-Pacific: Cost of Trade, Credit Information, Contract Enforcement and Regulatory Coherence," Working Papers 6709, Asia-Pacific Research and Training Network on Trade (ARTNeT), an initiative of UNESCAP and IDRC, Canada.. [Downloadable!]
  13. Davin Chor, 2006. "Unpacking Sources of Comparative Advantage: A Quantitative Approach," Working Papers 13-2008, Singapore Management University, School of Economics, revised Oct 2008. [Downloadable!]
  14. Buch, Claudia M. & Lipponer, Alexander, 2007. "Volatile multinationals? Evidence from the labor demand of German firms," Discussion Paper Series 1: Economic Studies 2007,22, Deutsche Bundesbank, Research Centre. [Downloadable!]
  15. Marianna Belloc & Samuel Bowles, 2009. "International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity," Working Papers 2009-08, University of Massachusetts Amherst, Department of Economics. [Downloadable!]
  16. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2007. "The Economic Consequences of Legal Origins," NBER Working Papers 13608, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  17. Miklos Koren & Silvana Tenreyro, 2007. "Technological Diversification," CEP Discussion Papers dp0824, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
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