We construct a dynamic, stochastic rational expectations model of labor reallocation within a trade model that is designed so that its key parameters can be estimated for trade policy analysis. A key feature is the presence of time-varying idiosyncratic moving costs faced by workers. As a consequence of these shocks: (i) Gross flows exceed net flows (an important feature of empirical labor movements); (ii) the economy features gradual and anticipatory adjustment to aggregate shocks; (iii) wage differentials across locations or industries can persist in the steady state; and (iv) the normative implications of policy can be very different from a model without idiosyncratic shocks, even when the aggregate behaviour of both models is similar. It is shown that the equilibrium solves a particular planner's problem, thus facilitating analytical results, econometric estimation, and simulation of the model for policy analysis.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13463.
Length: Date of creation: Oct 2007 Date of revision: Handle: RePEc:nbr:nberwo:13463
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Find related papers by JEL classification: F16 - International Economics - - Trade - - - Trade and Labor Market Interactions F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General K11 - Law and Economics - - Basic Areas of Law - - - Property Law
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