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Trade Reforms and the Labor Market

Listed author(s):
  • 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

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 476.

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Date of creation: 2004
Handle: RePEc:red:sed004:476
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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