Delay and dynamics in labor market adjustment: Simulation results
We study numerical simulations of a standard trade model with labor mobility costs added, modeled in such a way as to generate gross flows in excess of net flows. We find that adjustment to a trade shock can take a long time with plausible values of parameter values. In our base case, for the economy to move 95% of the distance to the new steady state takes well over a decade. Gross flows have a large effect on this rate of adjustment and on the normative effects of trade. Announcing and delaying the liberalization can build a constituency for free trade, but it can also destroy one. We study the conditions under which these two different outcomes occur.
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