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Mobility costs and the dynamics of labor market adjustment to external shocks: Theory

  • Stephen Cameron

    ()

    (Columbia University - School of International & Public Affairs)

  • Shubham Chaudhuri

    ()

    (Columbia University - Department of Economics)

  • John McLaren

    ()

    (Columbia University - Department of Economics)

We construct a dynamic, stochastic rational expectations model of labor reallocation that is designed so that its key parameters can be estimated for trade policy analysis. A key feature is the presence of time-varying idiosyncratic moving costs faced by workers. As a consequence of these shocks: (i) gross flows exceed net flows (an important feature of empirical labor movements); (ii) the economy features gradual and anticipatory adjustment to aggregate shocks; (iii) wage differentials across locations or industries can persist in the steady state; and (iv) the normative implications of policy can be very different from a model without idiosyncratic shocks, even when the aggregate behavior of both models is similar. It is shown that the solution to a particular planner's problem yields a competitive equilibrium, thus facilitating the analysis and simulation of the model for policy purposes.

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Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0102-53.

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Length: 38 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:clu:wpaper:0102-53
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