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Modelling the sectoral allocation of labour in open economy models

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  • Laura Povoledo

Abstract

Indivisible labour is not the only type of non-convexity affecting labour supply decisions. Another type of non-convexity arises in economies with sectors whenever individuals can work in only one sector at a time. I introduce this restriction into an open economy model with a tradeable and a non-tradeable sector, and I use lotteries to convexify the consumption possibilities set. This approach implies that the aggregate elasticity of labour supply becomes infinite. I compare the performance of the model with an analogous model in which the labour supply elasticity is finite. I find that there is a disconnect between the response of wages to monetary shocks and the open economy variables. The labour supply elasticity plays a more important role in the transmission of technology and government expenditure shocks to the real exchange rate and the terms of trade.

Suggested Citation

  • Laura Povoledo, 2017. "Modelling the sectoral allocation of labour in open economy models," Canadian Journal of Economics, Canadian Economics Association, vol. 50(3), pages 685-710, August.
    • Handle: RePEc:cje:issued:v:50:y:2017:i:3:p:685-710
    DOI: 10.1111/caje.12275
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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