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Trade Shocks and Labor Adjustment: Theory

  • Stephen Cameron
  • Shubham Chaudhuri
  • John McLaren

We construct a dynamic, stochastic rational expectations model of labor reallocation within a trade model that is designed so that its key parameters can be estimated for trade policy analysis. A key feature is the presence of time-varying idiosyncratic moving costs faced by workers. As a consequence of these shocks: (i) Gross flows exceed net flows (an important feature of empirical labor movements); (ii) the economy features gradual and anticipatory adjustment to aggregate shocks; (iii) wage differentials across locations or industries can persist in the steady state; and (iv) the normative implications of policy can be very different from a model without idiosyncratic shocks, even when the aggregate behaviour of both models is similar. It is shown that the equilibrium solves a particular planner's problem, thus facilitating analytical results, econometric estimation, and simulation of the model for policy analysis.

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File URL: http://www.nber.org/papers/w13463.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13463.

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Date of creation: Oct 2007
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Publication status: published as "Trade Shocks and Labor Adjustment: A Structural Empirical Approach.” Joint with Erhan Artuç and Shubham Chaudhuri. American Economic Review, June 2010.
Handle: RePEc:nbr:nberwo:13463
Note: ITI LS
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  1. Jovanovic, Boyan & Moffitt, Robert, 1988. "An Estimate Of A Sectoral Model Of Labor Mobility," Working Papers 88-32, C.V. Starr Center for Applied Economics, New York University.
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  3. An, Mark Yuying, 1995. "Logconcavity versus Logconvexity: A Complete Characterization," Working Papers 95-03, Duke University, Department of Economics.
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  14. Karp, Larry S. & Paul, Thierry, 1993. "Phasing In And Phasing Out Protectionism With Costly Adjustments Of Labour," Working Papers 51112, International Agricultural Trade Research Consortium.
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  16. Caroline L. Freund & John McLaren, 1999. "On the dynamics of trade diversion: evidence from four trade blocs," International Finance Discussion Papers 637, Board of Governors of the Federal Reserve System (U.S.).
  17. Neary, J Peter, 1985. "Theory and Policy of Adjustment in an Open Economy," CEPR Discussion Papers 61, C.E.P.R. Discussion Papers.
  18. Erhan Artuc & Shubham Chaudhuri & John McLaren, 2007. "Trade Shocks and Labor Adjustment: A Structural Empirical Approach," NBER Working Papers 13465, National Bureau of Economic Research, Inc.
  19. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
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