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Protection, openness, and factor adjustment : evidence from the manufacturing sector in Uruguay

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  • Casacuberta, Carlos
  • Gandelman, Nestor

Abstract

The authors use a panel of manufacturing firms to analyze the adjustment process in capital blue collar and white collar employment in Uruguay during a period of trade liberalization when average tariff protection fell from 43 to 14 percent. They calculate the desired factor levels arising from a counterfactual profit maximization in the absence of adjustment costs, generating a measure of factor shortages or surpluses. The average estimated output gap for 1982-95 is 2 percent. The authors'policy analysis shows that trade openness affected the adjustment functions of all three factors of production.Highly protected sectors adjust less when creating jobs (reducing labor shortages) than sectors with low protection. This may be due to fears of policy reversal in highly protected sectors. Also, highly protected sectors adjust more easily (than low protection sectors) when destroying jobs (reducing labor surpluses), especially in the case of blue collar labor. This suggests that trade protection may in fact destroy rather than create jobs within industries, as firms in highly protected sectors are more reluctant to hire and more ready to fire than firms in sectors with low protection. The results for capital are qualitatively similar but quantitatively smaller, suggesting that trade protection plays less of a role in explaining adjustment costs for capital. Interestingly, export-oriented sectors have lower adjustment costs for blue collar labor but not for white collar employment or capital, suggesting that export-led growth may be particularly successful in reducing blue collar unemployment.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3891.

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Date of creation: 01 Apr 2006
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Handle: RePEc:wbk:wbrwps:3891

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Keywords: Economic Theory&Research; Labor Markets; Free Trade; Economic Growth; Educational Sciences;

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  1. Giuseppe Bertola & Ricardo J. Caballero, 1991. "Irreversibility and Aggregate Investment," NBER Working Papers 3865, National Bureau of Economic Research, Inc.
  2. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc.
  3. Steve J. Davis & John Haltiwanger, 1991. "Gross job creation, gross job destruction and employment reallocation," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago 91-5, Federal Reserve Bank of Chicago.
  4. Caballero, Ricardo J & Engel, Eduardo M R A, 1993. "Microeconomic Adjustment Hazards and Aggregate Dynamics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(2), pages 359-83, May.
  5. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2010. "Factor Adjustments after Deregulation: Panel Evidence from Colombian Plants," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 378-391, May.
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  7. Matusz, Steven J. & Tarr, David, 1999. "Adjusting to trade policy reform," Policy Research Working Paper Series, The World Bank 2142, The World Bank.
  8. Adriana Cassoni & Gaston J. Labadie & Gabriela Fachola, 2002. "The Economic Effects of Unions in Latin America: Their Impact on Wages and the Economic Performance of Firms in Uruguay," Research Department Publications, Inter-American Development Bank, Research Department 3159, Inter-American Development Bank, Research Department.
  9. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(3), pages 1264-1292, September.
  10. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 838-55, December.
  11. Carlos Casacuberta & Gabriela Fachola & Nestor Gandelman, 2004. "The Impact of Trade Liberalization on Employment, Capital, and Productivity Dynamics: Evidence from the Uruguayan Manufacturing Sector," Research Department Publications, Inter-American Development Bank, Research Department 3170, Inter-American Development Bank, Research Department.
  12. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
  13. Russell Cooper & Jonathan L. Willis, 2003. "The economics of labor adjustment : mind the gap," Research Working Paper, Federal Reserve Bank of Kansas City RWP 03-05, Federal Reserve Bank of Kansas City.
  14. Ricardo J. Caballero & Eduardo M.R.A. Engel & John Haltiwanger, 1995. "Aggregate Employment Dynamics: Building From Microeconomic Evidence," NBER Working Papers 5042, National Bureau of Economic Research, Inc.
  15. Baldwin, Robert E. & Mutti, John H. & Richardson, J. David, 1980. "Welfare effects on the United States of a significant multilateral tariff reduction," Journal of International Economics, Elsevier, Elsevier, vol. 10(3), pages 405-423, August.
  16. Carlos Casacuberta & Gabriela Fachola & Néstor Gandelman, 2011. "Employment, Capital, And Productivity Dynamics: Evidence From The Manufacturing Sector In Uruguay," The Developing Economies, Institute of Developing Economies, Institute of Developing Economies, vol. 49(3), pages 266-296, 09.
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  18. repec:rus:hseeco:122439 is not listed on IDEAS
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Cited by:
  1. Flora Bellone & Jérémy Mallen-Pisano, 2013. "Is Misallocation Higher in France than in the United States?," GREDEG Working Papers, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis 2013-38, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
  2. María Pía Olivero & Yoto V. Yotov, 2012. "Dynamic gravity: endogenous country size and asset accumulation," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 45(1), pages 64-92, February.

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