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Trade Liberalization and Labor Market Dynamics

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  • Rafael Dix-Carneiro

    (Princeton University)

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    Abstract

    This paper studies trade-induced transitional dynamics by estimating a structural dynamic equilibrium model of the labor market. The model features a multi-sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector-specific experience and costly switching of sectors. The estimation employs a large panel of workers constructed from Brazilian matched employer-employee data. The model’s estimates yield high average costs of mobility that are very dispersed across the population. In addition, sector-specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model as a laboratory for counterfactual experiments, this paper finds that: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly mitigated due to the slow adjustment; (3) trade-induced welfare effects are very heterogeneous across the population; (4) retraining workers initially employed in the adversely affected sector may reduce losses incurred by these workers and increase aggregate welfare; (5) a moving subsidy that covers costs of mobility is more promising for compensating losers, although at the expense of higher welfare adjustment costs. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of physical capital.

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    File URL: http://www.princeton.edu/ceps/workingpapers/212dix-carneiro.pdf
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    Bibliographic Info

    Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 1273.

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    Date of creation: Nov 2010
    Date of revision:
    Handle: RePEc:pri:cepsud:212dix-carneiro

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    Related research

    Keywords: Trade Liberalization; Labor Market Dynamics; Adjustment Costs; Worker Heterogeneity; Structural Econometric Models;

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    References

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    1. Carl Davidson & Steven Matusz, 2005. "Trade Liberalization and Compensation," International Trade 0503008, EconWPA.
    2. Douglas Gollin, 2001. "Getting Income Shares Right," Department of Economics Working Papers 2001-11, Department of Economics, Williams College.
    3. Naércio Aquino Menezes Filho & Marc-Andreas Muendler, 2007. "Labor Reallocation in Response to Trade Reform," CESifo Working Paper Series 1936, CESifo Group Munich.
    4. Erhan Artuc & Shubham Chaudhuri & John McLaren, 2007. "Trade Shocks and Labor Adjustment: A Structural Empirical Approach," NBER Working Papers 13465, National Bureau of Economic Research, Inc.
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    6. Helpman, Elhanan & Itskhoki, Oleg, 2009. "Labor Market Rigidities, Trade, and Unemployment," CEPR Discussion Papers 7502, C.E.P.R. Discussion Papers.
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    18. Donghoon Lee & Kenneth I. Wolpin, 2004. "Intersectoral Labor Mobility and the Growth of the Service Sector," PIER Working Paper Archive 04-036, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    19. Jeffrey M Wooldridge, 2002. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," CeMMAP working papers CWP18/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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    Cited by:
    1. Muendler, Marc-Andreas, 2007. "Labor Reallocation in Response to Trade Reform," University of California at San Diego, Economics Working Paper Series qt3cm38535, Department of Economics, UC San Diego.
    2. Arias, Javier & Artuc, Erhan & Lederman, Daniel & Rojas, Diego, 2013. "Trade, informal employment and labor adjustment costs," Policy Research Working Paper Series 6614, The World Bank.
    3. Kaplan, David S. & Lederman, Daniel & Robertson, Raymond, 2012. "What drives short-run labor market volatility in offshoring industries ? evidence from northern Mexico during 2007-2009," Policy Research Working Paper Series 6268, The World Bank.

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