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Long‐run Lunacy, Short‐run Sanity: a Simple Model of Trade with Labor Market Turnover

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  • Carl Davidson
  • Steven J. Matusz

Abstract

It is often argued that international trade is all about long‐run relationships. In this paper, we argue that this view is flawed when factor markets are characterized by turnover. Toward that end, we provide a simple dynamic model of trade with labor market turnover and show that the relationship between the economy's short‐run and long‐run behavior is more complex than in traditional trade models. For example, in the short run, the economy may produce outside of its long‐run frontier. We show that focusing on long‐run relationships can lead one to draw faulty policy conclusions, while focusing on its short‐run behavior restores sanity. The implication is that in the presence of factor market turnover, international trade issues can only be understood by studying the entire dynamic path of the economy. Long‐run relationships should be ignored.

Suggested Citation

  • Carl Davidson & Steven J. Matusz, 2006. "Long‐run Lunacy, Short‐run Sanity: a Simple Model of Trade with Labor Market Turnover," Review of International Economics, Wiley Blackwell, vol. 14(2), pages 261-276, May.
  • Handle: RePEc:bla:reviec:v:14:y:2006:i:2:p:261-276
    DOI: 10.1111/j.1467-9396.2006.00574.x
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    Cited by:

    1. Artuc, Erhan & Lederman, Daniel & Porto, Guido, 2015. "A mapping of labor mobility costs in the developing world," Journal of International Economics, Elsevier, vol. 95(1), pages 28-41.
    2. Bruno Decreuse & Paul Maarek, 2015. "FDI and the Labor Share in Developing Countries : A Theory and Some Evidence," Annals of Economics and Statistics, GENES, issue 119-120, pages 289-319.
    3. Mario Larch & Wolfgang Lechthaler, 2013. "Whom to send to Doha? The Short-sighted Ones!," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 634-649, October.
    4. Shoya Ishimaru & Soo Hyun Oh & Seung-Gyu Sim, 2017. "Trade preferences and political equilibrium associated with trade liberalization," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 26(3), pages 361-384, April.
    5. Mazumder, Debojyoti, 2013. "Inheritance, Search Friction and International Trade: A General Equilibrium Model," MPRA Paper 55250, University Library of Munich, Germany.
    6. Heid, Benedikt & Larch, Mario, 2016. "Gravity with unemployment," Journal of International Economics, Elsevier, vol. 101(C), pages 70-85.
    7. Emily Blanchard & Gerald Willmann, 2007. "Political Stasis or Protectionist Rut? Policy Mechanisms for Trade Reform in a Democracy," CESifo Working Paper Series 2070, CESifo.
    8. Elhanan Helpman & Oleg Itskhoki, 2010. "Labour Market Rigidities, Trade and Unemployment," Review of Economic Studies, Oxford University Press, vol. 77(3), pages 1100-1137.
    9. Mazumder, Debojyoti & Santra, Sattwik, 2009. "Unemployment and Inheritance Linkage: A Dynamic General Equilibrium Analysis," MPRA Paper 57161, University Library of Munich, Germany.
    10. Tang, Heiwai, 2012. "Labor market institutions, firm-specific skills, and trade patterns," Journal of International Economics, Elsevier, vol. 87(2), pages 337-351.
    11. Braun, Sebastian & Lechthaler, Wolfgang & Mileva, Mariya, 2014. "The effects of globalization on wage inequality: New insights from a dynamic trade model with heterogeneous firms," Kiel Policy Brief 70, Kiel Institute for the World Economy (IfW Kiel).
    12. Benedikt Heid, 2014. "Essays on International Trade and Development," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 55.
    13. Davidson, Carl & Matusz, Steven J., 2012. "A model of globalization and firm-worker matching: How good is good enough?," International Review of Economics & Finance, Elsevier, vol. 23(C), pages 5-15.
    14. Mariya Mileva & Sebastian Braun & Wolfgang Lechthaler, 2013. "The Effects of Globalisation on Wage Inequality: New Insights from a Dynamic Trade Model with Heterogeneous Firms. WWWforEurope Working Paper No. 49," WIFO Studies, WIFO, number 47093, December.

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