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Technical Change Biased Toward the Traded Sector and Labor Market Frictions

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  • Luisito BERTINELLI
  • Olivier CARDI

    ()

  • Romain RESTOUT

Abstract

This paper investigates the relative wage and the relative price effects of higher productivity growth in tradables relative to non tradables in a two-sector open economy model with search unemployment. Applying cointegration methods to a panel of eighteen OECD countries over the period 1970-2007, our estimates reveal that a 1 percentage point increase in the productivity differential between tradables and non tradables lowers the non traded wage relative to the traded wage (relative wage) by 0.22% and appreciates the relative price of non tradables by 0.64%. While the decline in the relative wage reveals the presence of mobility costs preventing from the wage equalization across sectors, the relative wage responses to a productivity differential display a large dispersion across countries, thus suggesting that labor market frictions vary substantially across OECD economies. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that the relative wage significantly declines more in countries where labor market regulation is more pronounced. These empirical findings can be rationalized in a two-sector open economy model with search in the labor market and an endogenous labor force participation. In line with our estimates, our quantitative analysis reveals that the relative wage falls more in countries where unemployment benefits are more generous, firing cost is high, the worker bargaining power is large, and/or the labor force is less responsive at the extensive margin. When calibrating the model to each OECD economy, our numerical results reveal that the model predicts the relative wage response fairly well, and to a lesser extent the relative price response.
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  • Luisito BERTINELLI & Olivier CARDI & Romain RESTOUT, 2015. "Technical Change Biased Toward the Traded Sector and Labor Market Frictions," LEO Working Papers / DR LEO 2298, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
  • Handle: RePEc:leo:wpaper:2298
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    Cited by:

    1. Olivier Cardi & Peter Claeys & Romain Restout, 2016. "Imperfect Mobility Of Labor Across Sectors And Fiscal Transmission," Working Papers of BETA 2016-39, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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