Marginal intra‐industry trade and adjustment costs in the first phase of transition

Purpose - The aim of the paper is to investigate some dynamic aspects of the smooth adjustment hypothesis (SAH) associated with intra‐industry trade (IIT). The structure of trade expansion in Hungary and Poland over the period 1990‐1998 and its implications for labour market adjustment is examined. Design/methodology/approach - The paper applies an econometric approach and considers three‐digit International Standard Industry Classification classified data. The paper uses a model developed by recent empirical literature, both in static and dynamic forms and tests whether the results are sensitive for the choice of length of period and marginal intra‐industry indices. Findings - The econometric analysis suggests that changes in domestic consumption and productivity have significant influence on employment changes. Significant and negative relationships were found between trade openness and employment changes. The calculations provide some evidence to support SAH, especially for Poland. However, the effects of IIT on employment changes are small especially to additional hypotheses. The estimations show that partial trade liberalisation in Hungary and Poland has led to lower adjustment costs. Originality/value - The paper is one of the first to focus on labour market adjustment costs in transition countries. Its results also reveal that the estimations on the impacts of trade liberalisations should be interpreted only with care due to sensitivity on the length of time period and applied econometric techniques.