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Productivity Gains Biased Toward the Traded Sector and Labor Market Frictions

Author

Listed:
  • Luisito Bertinelli

    () (CREA, Université du Luxembourg)

  • Olivier Cardi

    () (LEO, Université de Tours, Université de Paris 2, CRED)

  • Romain Restout

    () (BETA, Université de Lorraine - IRES, Université catholique de Louvain)

Abstract

This paper develops a tractable version of a two-sector open economy model with search frictions in order to account for the relative price and relative wage effect of technology shocks biased toward the traded sector. Using a panel of eighteen OECD countries, our estimates show that higher productivity in tradables relative to non trad- ables causes an appreciation in the relative price of non tradables along with a decline in non traded relative to traded wages while both responses display a considerable dis- persion across countries. The fall in the relative wage reveals the presence of mobility costs preventing wage equalization across sectors, while the cross-country dispersion in the relative wage responses suggest differences in labor market regulation. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that the relative wage significantly declines more and the relative price appreciates less in countries where labor market regulation is more pronounced. We show that these empirical findings can be rationalized in a two-sector open economy model with search in the labor market as long as we allow for an endogenous sectoral labor force participation decision. When we calibrate the model to country-specific data, the model performs well in reproducing the cross-country pattern in the relative wage responses and to a lesser extent in the relative price changes. While the responses of the relative wage and the relative price display a wide dispersion across countries, both display a significant negative relationship with labor market regulation.

Suggested Citation

  • Luisito Bertinelli & Olivier Cardi & Romain Restout, 2016. "Productivity Gains Biased Toward the Traded Sector and Labor Market Frictions," CREA Discussion Paper Series 16-14, Center for Research in Economic Analysis, University of Luxembourg.
  • Handle: RePEc:luc:wpaper:16-14
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    File URL: http://wwwfr.uni.lu/content/download/94743/1149189/file/2016_14%20Productivity%20Gains%20Biased%20Toward%20the%20Traded%20Sector%20and%20Labor%20Market%20Frictions.pdf
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    References listed on IDEAS

    as
    1. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    2. Chang, Yoosoon, 2002. "Nonlinear IV unit root tests in panels with cross-sectional dependency," Journal of Econometrics, Elsevier, vol. 110(2), pages 261-292, October.
    3. de Cordoba, Gonzalo Fernandez & Kehoe, Timothy J., 2000. "Capital flows and real exchange rate fluctuations following Spain's entry into the European Community," Journal of International Economics, Elsevier, vol. 51(1), pages 49-78, June.
    4. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    5. Paul Cashin & C. John McDermott, 2003. "Intertemporal Substitution and Terms-of-Trade Shocks," Review of International Economics, Wiley Blackwell, vol. 11(4), pages 604-618, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Productivity differential; Sectoral wages; Relative price of non tradables; Search theory; Labor market institutions; Labor mobility.;

    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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