Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage

Alejandro Cuñat and Marc J. Melitz

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: This paper studies the link between volatility, labor market flexibility, and international trade.International differences in labor market regulations affect how firms can adjust to idiosyncraticshocks. These institutional differences interact with sector specific differences in volatility (thevariance of the firm-specific shocks in a sector) to generate a new source of comparative advantage.Other things equal, countries with more flexible labor markets specialize in sectors with highervolatility. Empirical evidence for a large sample of countries strongly supports this theory: the exportsof countries with more flexible labor markets are biased towards high-volatility sectors. We show howdifferences in labor market institutions can be parsimoniously integrated into the workhorse model ofRicardian comparative advantage of Dornbush, Fisher and Samuelson (1977). We also show how ourmodel can be extended to multiple factors of production.

Keywords: comparative; advantage (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cse and nep-int
Date: 2007-06
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Related works:
Working Paper: Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage (2007)
Working Paper: Volatility, Labour Market Flexibility, and the Pattern of Comparative Advantage (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0799

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