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Modelling the sectoral allocation of labour in open economy models

  • Laura Povoledo

    (University of the West of England, Bristol)

Indivisible labour is not the only type of nonconvexity affecting labour supply decisions. Another type of nonconvexity arises in economies with sectors whenever individuals can work in only one sector at a time. I introduce this restriction into an open economy model with a tradeable and a nontradeable sector, and I use lotteries to convexify the consumption possibilities set. This approach implies that the aggregate elasticity of labour supply becomes infinite. I compare the performance of the model with an analogous model in which the labour supply elasticity is finite. I find that the infinite labour supply elasticity helps explain the persistence of net exports. However, all the other consequences of the labour supply elasticity for the model-implied second-order moments depend on whether the pricing assumption is Producer Currency Pricing (PCP) or Local Currency Pricing (LCP).

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File URL: http://www2.uwe.ac.uk/faculties/BBS/BUS/Research/Economics13/1312.pdf
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Paper provided by Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol in its series Working Papers with number 20131312.

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Date of creation: 12 Jan 2013
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Handle: RePEc:uwe:wpaper:20131312
Contact details of provider: Postal: 0117 328 3610
Phone: 0117 328 3610
Web page: http://www1.uwe.ac.uk/bl/research/bristoleconomics.aspx

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