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Intra-industry trade and labor costs: The smooth adjustment hypothesis

  • Horácio Faustino
  • Nuno Leitão

According to the smooth adjustment hypothesis (SAH), the labor-market adjustment costs in the form of unemployed resources will be lower if trade expansion is intra-industry rather than inter-industry in nature. This is what we attempt to test empirically using the Brulhart (1994) marginal intra-industry trade (MIIT) index and a dynamic panel data analysis. Considering the contemporaneous effect the results do not support the SAH. However, if we consider the one- year and-two years lags effects, the conclusion is different and it is sensitive to the size of the lag. Comparing with other empirical studies our results suggest that the validity of SAH depends on the variable choose as adjustment labor cost index, the time lag structure and the set of control variables. KEY Words: Adjustment costs; labor market; marginal intra-industry trade.

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Paper provided by ISEG - School of Economics and Management, Department of Economics, University of Lisbon in its series Working Papers Department of Economics with number 2009/17.

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Date of creation: Mar 2009
Date of revision:
Handle: RePEc:ise:isegwp:wp172009
Contact details of provider: Postal: Department of Economics, ISEG - School of Economics and Management, University of Lisbon, Rua do Quelhas 6, 1200-781 LISBON, PORTUGAL
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