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Lost in Transition: The Costs and Consequences of Sectoral Labour Adjustment


  • Stephen Tapp

    () (Queen's University)


This paper demonstrates that factors which impede labour market adjustments can have first-order impacts on aggregate output and social welfare. While several studies find that individual workers can face large and persistent sectoral reallocation costs, this paper shows that these costs are important at the aggregate level. I use a search and matching model to isolate and quantify two factors that contribute to the costly and time-consuming adjustment process: search frictions and an inability to transfer match-specific skills to new jobs. I apply the model to examine Canada's sectoral labour adjustment after a global increase in commodity prices and associated exchange rate appreciation. These developments reorganized production to the resource sector and away from manufacturing. The model quantitatively captures both the sectoral employment and wage effects and the response of unemployment to changes in unemployment benefits. The model estimates that the costs of adjustment are economically important, accounting for up to three percent of output during the transition. These costs arise mainly in the first three years after the shock and are due largely to non-transferable skills. Finally, the analysis reveals important policy implications. Because changes to unemployment benefits affect sectors differently, these changes impact the economy's sectoral composition and aggregate productivity.

Suggested Citation

  • Stephen Tapp, 2007. "Lost in Transition: The Costs and Consequences of Sectoral Labour Adjustment," Working Papers 1142, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1142

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    References listed on IDEAS

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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Labour market flows revisited
      by Stephen Gordon in Worthwhile Canadian Initiative on 2015-10-16 05:56:42


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    Cited by:

    1. Dorothee Flaig & Harald Grethe & Scott McDonald & Khalid Siddig, 2012. "Intersectoral factor movements: do adjustment costs matter for welfare?," EcoMod2012 4418, EcoMod.
    2. Yahong Zhang, 2013. "Unemployment Fluctuations in a Small Open-Economy Model with Segmented Labour Markets: The Case of Canada," Staff Working Papers 13-40, Bank of Canada.

    More about this item


    Sectoral Labour Reallocation; Adjustment Costs; Search and Matching; Skills and Training; Unemployment;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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