We study a simple, tractable model of labor adjustment in a trade model that allows us to analyze the economy's dynamic response to trade liberalization. Since it is a neoclassical market-clearing model, we can use duality techniques to study the equilibrium, and despite its simplicity a rich variety of properties emerge. The model generates gross flows of labor across industries, even in the steady state; persistent wage differentials across industries; gradual adjustment to a liberalization; and anticipatory adjustment to a pre-announced liberalization. Pre-announcement makes liberalization less attractive to export-sector workers and more attractive to import-sector workers, eventually making workers unanimous either in favor of or in opposition to liberalization. Based on these results, we identify many pitfalls to conventional methods of empirical study of trade liberalization that are based on static models.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13464.
Length: Date of creation: Oct 2007 Date of revision: Handle: RePEc:nbr:nberwo:13464
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Find related papers by JEL classification: F16 - International Economics - - Trade - - - Trade and Labor Market Interactions F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General J7 - Labor and Demographic Economics - - Labor Discrimination
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