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Evaluating Labour Adjustment Costs from Trade Shocks: Illustrations for the U.S. Economy Using an Applied General Equilibrium Model With Transactions

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  • Ramon L. Clarete
  • Irene Trela
  • John Whalley

Abstract

This paper presents a general equilibrium approach to calculating labour adjustment costs induced by trade policy changes or external sector shocks, which we illustrate by analyzing the adjustment consequences of eliminating quotas and tariffs on U.S. imports. In our approach, factor adjustments in the presence of transactions costs are endogenously determined within the equilibrium structure. The conventional way of calculating such labour adjustment costs is to use full equilibrium models which exclude adjustment costs, and apply exogenous estimates of duration of unemployment to implied intersectoral labour reallocations. By using an equilibrium model in which adjustment costs are absent, the conventional approach tends to overstate the amount of labour that moves to other sectors and hence introduces an upward bias to estimates of adjustment costs. As well, such an approach tends to ignore the impact on intersectoral wage rates. Our results suggest that concerns over adjustment problems should focus as much on the consequences of adjustment costs in impeding factor mobility, as on the magnitude of the adjustment costs themselves. Compared to the redistributive effects they induce by inhibiting labour movement in response to policy or other changes, these costs may be small.

Suggested Citation

  • Ramon L. Clarete & Irene Trela & John Whalley, 1994. "Evaluating Labour Adjustment Costs from Trade Shocks: Illustrations for the U.S. Economy Using an Applied General Equilibrium Model With Transactions," NBER Working Papers 4628, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4628
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    References listed on IDEAS

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    1. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550.
    2. Baldwin, Robert E. & Mutti, John H. & Richardson, J. David, 1980. "Welfare effects on the United States of a significant multilateral tariff reduction," Journal of International Economics, Elsevier, vol. 10(3), pages 405-423, August.
    3. Bale, Malcolm D., 1976. "Estimates of trade-displacement costs for U.S. workers," Journal of International Economics, Elsevier, vol. 6(3), pages 245-250, August.
    4. Nguyen, Trien T. & Whalley, John, 1986. "Equilibrium under price controls with endogenous transactions costs," Journal of Economic Theory, Elsevier, vol. 39(2), pages 290-300, August.
    5. Foley, Duncan K., 1970. "Economic equilibrium with costly marketing," Journal of Economic Theory, Elsevier, vol. 2(3), pages 276-291, September.
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    Cited by:

    1. Rossana Patrón, 1999. "The imperfect mobility of labour: Going from theory to ‘virtual’ reality. Simulations with simple trade models," Documentos de Trabajo (working papers) 2299, Department of Economics - dECON.
    2. Chan, Nguyen & Dung, Tran Kim & Ghosh, Madanmohan & Whalley, John, 2005. "Adjustment costs in labour markets and the distributional effects of trade liberalization: Analytics and calculations for Vietnam," Journal of Policy Modeling, Elsevier, vol. 27(9), pages 1009-1024, December.
    3. Alvaro Forteza & Rossana Patrón, 2003. "Trade Liberalisation with Costly Adjustment," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 95-125, May.
    4. Ramon L. Clarete, 2017. "Measuring Trade Costs and Gains from Trade Facilitation in the Philippines," UP School of Economics Discussion Papers 201706, University of the Philippines School of Economics.

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