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

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Cuñat, Alejandro
Melitz, Marc J

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Abstract

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

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6297.

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Date of creation: May 2007
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Handle: RePEc:cpr:ceprdp:6297

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Related research
Keywords: comparative advantage; labour market flexibility;

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F1 - International Economics - - Trade

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References listed on IDEAS
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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. 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!]
  3. 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)
  4. Michelacci, Claudio & Schivardi, Fabiano, 2008. "Does Idiosyncratic Business Risk Matter?," CEPR Discussion Papers 6910, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. Chris Heaton & Paul Oslington, 2006. "Micro Vs Macro Explanations of Post-War US Unemployment Movements," Research Papers 0604, Macquarie University, Department of Economics. [Downloadable!]
  6. 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!]
  7. Markus Poschke, 2006. "Employment Protection, Firm Selection, and Growth," Economics Working Papers ECO2006/35, European University Institute. [Downloadable!]
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  8. 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)
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  9. Miklos Koren & Silvana Tenreyro, 2007. "Technological Diversification," CEP Discussion Papers dp0824, Centre for Economic Performance, LSE. [Downloadable!]
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  10. 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!]
  11. Luis Araujo & Emanuel Ornelas, 2007. "Trust-Based Trade," CEP Discussion Papers dp0820, Centre for Economic Performance, LSE. [Downloadable!]
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  12. 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!]
  13. 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!]
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  14. Eran Yashiv, 2007. "The Beveridge Curve," CEP Discussion Papers dp0807, Centre for Economic Performance, LSE. [Downloadable!]
  15. 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!]
  16. 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!]
  17. 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!]
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