Trade Shocks and Labor Adjustment: Theory

Stephen Cameron, Shubham Chaudhuri and John McLaren

No 13463, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We construct a dynamic, stochastic rational expectations model of labor reallocation within a trade model that is designed so that its key parameters can be estimated for trade policy analysis. A key feature is the presence of time-varying idiosyncratic moving costs faced by workers. As a consequence of these shocks: (i) Gross flows exceed net flows (an important feature of empirical labor movements); (ii) the economy features gradual and anticipatory adjustment to aggregate shocks; (iii) wage differentials across locations or industries can persist in the steady state; and (iv) the normative implications of policy can be very different from a model without idiosyncratic shocks, even when the aggregate behaviour of both models is similar. It is shown that the equilibrium solves a particular planner's problem, thus facilitating analytical results, econometric estimation, and simulation of the model for policy analysis.

JEL-codes: F16 F42 J60 K11 (search for similar items in EconPapers)
Date: 2007-10
New Economics Papers: this item is included in nep-dge, nep-int and nep-law
Note: ITI LS
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Citations: View citations in EconPapers (18)

Published as "Trade Shocks and Labor Adjustment: A Structural Empirical Approach.” Joint with Erhan Artuç and Shubham Chaudhuri. American Economic Review, June 2010.

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