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Imperfect Mobility of Labor Across Sectors A Reappraisal of the Balassa-Samuelson Effect

Listed author(s):
  • Olivier Cardi

    (Université François Rabelais - Tours, LEO - Laboratoire d'économie d'Orleans - CNRS - Centre National de la Recherche Scientifique - UO - Université d'Orléans, CRED - Centre de Recherches en Economie et Droit - UP2 - Université Panthéon-Assas - M.E.N.E.S.R. - Ministère de l'Éducation nationale, de l’Enseignement supérieur et de la Recherche)

  • Romain Restout

    (BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique, UCL - Université Catholique de Louvain)

This paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two-sector open economy model with imperfect substitutability in hours worked across sectors. The Balassa- Samuelson [1964] model predicts that a rise in the sectoral productivity ratio by 1% raises the relative price of non tradables by 1% while leaving the non traded wage-traded wage ratio unchanged. Applying cointegration methods to a panel of fourteen OECD countries over the period 1970-2007, our estimates show that the relative price rises by only 0.78% and the relative wage falls by 0.27%. While our first set of empirical findings cast doubt on the quantitative predictions of the Balassa-Samuelson model, our second set of evidence highlights the role of imperfect labor mobility: the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted in countries with higher intersectoral reallocation of labor. We show that the ability of the two-sector model to account for our evidence quantitatively relies upon two ingredients: i) imperfect mobility of labor across sectors, and ii) physical capital accumulation. Finally, our numerical results reveal that the model predicts the relative price response fairly well, and to a lesser extent the relative wage response.

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Date of creation: 2015
Handle: RePEc:hal:wpaper:halshs-01252478
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