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Trade Shocks and Factor Adjustment Frictions: Implications for Investment and Labor

  • Erhan Artuç
  • Germán Bet
  • Irene Brambilla
  • Guido Porto

When export opportunities arise, the gains from trade can only be materialized if the economy adjusts. In order to expand and meet new markets, firms must hire new workers and tune their capital stock by investing in product lines, machines and equipment. If this process is costly and imperfect, the economy reacts partially and gradually. We formulate a multi-sector dynamic model featuring capital adjustment costs, firm heterogeneity, and labor mobility costs that we fit to data from Argentina. We estimate the structural capital and labor adjustment cost parameters and using counterfactual simulations we quantify the complementarity between trade shocks and domestic frictions: in the presence of lower costs of factor adjustment there is a sizeable incremental impact of trade shocks on capital, employment, wages, and output. The complementarity is larger for smaller trade shocks, and a large fraction of the capital complementarity is explained by an extensive margin (i.e. firms which do not respond to trade shocks when adjustment costs are high).

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Paper provided by Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata in its series Department of Economics, Working Papers with number 101.

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Length: 56 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:lap:wpaper:101
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Web page: http://www.depeco.econo.unlp.edu.ar/doctrab.php
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  1. Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," Papers 0062, Boston University - Industry Studies Programme.
  2. Gueorgui Kambourov, 2009. "Labour Market Regulations and the Sectoral Reallocation of Workers: The Case of Trade Reforms," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1321-1358.
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  11. Moritz Ritter, 2012. "Offshoring and Occupational Specificity of Human Capital," DETU Working Papers 1207, Department of Economics, Temple University.
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