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Modelling the sectoral allocation of labour in open economy models

Laura Povoledo

Canadian Journal of Economics, 2017, vol. 50, issue 3, 685-710

Abstract: Indivisible labour is not the only type of non-convexity affecting labour supply decisions. Another type of non-convexity 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 non-tradeable 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 there is a disconnect between the response of wages to monetary shocks and the open economy variables. The labour supply elasticity plays a more important role in the transmission of technology and government expenditure shocks to the real exchange rate and the terms of trade.

JEL-codes: E24 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Modelling the sectoral allocation of labour in open economy models (2012) Downloads
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