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Intersectoral adjustment and unemployment in a two-country Ricardian model

  • Didier LAUSSEL

    (GREQAM / IDEP et Université de la Méditerranée)

  • Philippe MICHEL

    (Institut Universitaire de France, GREQAM et Université de la Méditerranée)

  • Thierry Paul

    (GREQAM / IDEP et Université de la Méditerranée)

In a two-country Ricardian model, we study the dynamics of intersectoral reallocation of labour following upon a once and for ail move to free trade. The job creation/destruction process in both sectors is slow and this results in unemployment during the transition toward the long run free trade equilibrium. We identify different free trade regimes depending on whether or not the world relative price is between the two autarkic prices. In some regimes, one of the two countries overshoots its autarkic equilibrium i.e. temporarily specializes according to its comparative disadvantage. In that case, welfare increases in both countries. In other regimes, the adjustment process is monotonie in both countries but welfare increases in only one country. When the two countries have "very" different rates of job creation/destruction, the world price adjusts in such a way that the difference in adjustment speed between the two countries decreases.

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 2004023.

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Length: 24
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:ctl:louvre:2004023
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  1. J. Peter Neary, 1982. "Intersectoral Capital Mobility, Wage Stickiness, and the Case for Adjustment Assistance," NBER Chapters, in: Import Competition and Response, pages 39-72 National Bureau of Economic Research, Inc.
  2. Robert C. Feenstra & Tracy R. Lewis, 1991. "Trade Adjustment Assistance and Pareto Gains From Trade," NBER Working Papers 3845, National Bureau of Economic Research, Inc.
  3. Larry Karp & Thierry Paul, 2005. "Intersectoral Adjustment and Policy Intervention: the Importance of General-Equilibrium Effects," Review of International Economics, Wiley Blackwell, vol. 13(2), pages 330-355, 05.
  4. K.C. Fung & Robert W. Staiger, 1994. "Trade Liberalization and Trade Adjustment Assistance," International Trade 9411002, EconWPA.
  5. Dixit, Avinash, 1989. "Intersectoral capital reallocation under price uncertainty," Journal of International Economics, Elsevier, vol. 26(3-4), pages 309-325, May.
  6. Dehejia, Vivek, 1997. "Will Gradualism Work When Shock Therapy Doesn't?," CEPR Discussion Papers 1552, C.E.P.R. Discussion Papers.
  7. Karp, Larry S. & Paul, Thierry, 1993. "Phasing In And Phasing Out Protectionism With Costly Adjustments Of Labour," Working Papers 51112, International Agricultural Trade Research Consortium.
  8. Karp, Larry & Paul, Thierry, 1998. "Labor adjustment and gradual reform: when is commitment important?," Journal of International Economics, Elsevier, vol. 46(2), pages 333-362, December.
  9. Mussa, Michael, 1974. "Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1191-1203, Nov.-Dec..
  10. Baldwin, Richard & Venables, Anthony J, 1994. "International Migration, Capital Mobility and Transitional Dynamics," Economica, London School of Economics and Political Science, vol. 61(243), pages 285-300, August.
  11. Dixit, Avinash & Rob, Rafael, 1994. "Risk-sharing, adjustment, and trade," Journal of International Economics, Elsevier, vol. 36(3-4), pages 263-287, May.
  12. Hamermesh, Daniel S. & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers 1371, C.E.P.R. Discussion Papers.
  13. Mayer, Wolfgang, 1974. "Short-Run and Long-Run Equilibrium for a Small Open Economy," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 955-67, Sept./Oct.
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