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Trade Reforms and the Labor Market


  • Gueorgui Kambourov


Barriers to trade lead to significant distortions in domestic prices and cause an inefficient allocation of resources across sectors. An expected outcome of a trade reform is a significant sectoral reallocation of labor in the economy. The amount and speed of the reallocation, however, will also depend on the particular characteristics of the labor market - a flexible labor market will facilitate the required reallocation of labor while a highly restrictive labor market will slow it down. This paper studies the effect of firing costs on the performance of an economy that implements a trade liberalization reform. I find that if Chile did not liberalize its labor market at the outset of its trade reform, then the intersectoral reallocation of workers would have been considerably slower and as much as one third of the actual benefits from the trade reform would have been lost. From a policy standpoint, the results imply that trade liberalization reforms are desirable but need to be complemented by labor market reforms in order to be successful

Suggested Citation

  • Gueorgui Kambourov, 2004. "Trade Reforms and the Labor Market," 2004 Meeting Papers 476, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:476

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    trade liberalization; firing costs; sectoral reallocation; human capital;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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