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Trade Liberalization and Labor Market Dynamics

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  • Rafael Dix-Carneiro

    (Princeton University)

Abstract

This paper studies trade-induced transitional dynamics by estimating a structural dynamic equilibrium model of the labor market. The model features a multi-sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector-specific experience and costly switching of sectors. The estimation employs a large panel of workers constructed from Brazilian matched employer-employee data. The model?s estimates yield high average costs of mobility that are very dispersed across the population. In addition, sector-specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model as a laboratory for counterfactual experiments, this paper finds that: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly mitigated due to the slow adjustment; (3) trade-induced welfare effects are very heterogeneous across the population; (4) retraining workers initially employed in the adversely affected sector may reduce losses incurred by these workers and increase aggregate welfare; (5) a moving subsidy that covers costs of mobility is more promising for compensating losers, although at the expense of higher welfare adjustment costs. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of physical capital.

Suggested Citation

  • Rafael Dix-Carneiro, 2010. "Trade Liberalization and Labor Market Dynamics," Working Papers 1273, Princeton University, Department of Economics, Center for Economic Policy Studies..
  • Handle: RePEc:pri:cepsud:212dix-carneiro.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Lechthaler, Wolfgang & Mileva, Mariya, 2013. "Trade liberalization and wage inequality: New insights from a dynamic trade model with heterogeneous firms and comparative advantage," Kiel Working Papers 1886, Kiel Institute for the World Economy (IfW).
    2. Naércio Aquino Menezes Filho & Marc-Andreas Muendler, 2007. "Labor Reallocation in Response to Trade Reform," CESifo Working Paper Series 1936, CESifo Group Munich.
    3. Lechthaler, Wolfgang & Mileva, Mariya, 2014. "Smoothing the adjustment to trade liberalization," Kiel Working Papers 1948, Kiel Institute for the World Economy (IfW).
    4. repec:hrv:faseco:34557509 is not listed on IDEAS
    5. Arias, Javier & Artuc, Erhan & Lederman, Daniel & Rojas, Diego, 2013. "Trade, informal employment and labor adjustment costs," Policy Research Working Paper Series 6614, The World Bank.
    6. Kaplan, David S. & Lederman, Daniel & Robertson, Raymond, 2012. "What drives short-run labor market volatility in offshoring industries ? evidence from northern Mexico during 2007-2009," Policy Research Working Paper Series 6268, The World Bank.

    More about this item

    Keywords

    Trade Liberalization; Labor Market Dynamics; Adjustment Costs; Worker Heterogeneity; Structural Econometric Models;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • J00 - Labor and Demographic Economics - - General - - - General
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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