Patterns of Labour Market Adjustment to Trade Shocks with Imperfect Capital Mobility

Erhan Artuc, Irene Brambilla and Guido Porto

The Economic Journal, 2022, vol. 132, issue 646, 2048-2074

Abstract: We explore how different investment frictions affect the patterns of responses of labour markets to tariff cuts. To investigate these patterns, we formulate a multi-sector dynamic model featuring capital and labour adjustment costs that we fit to Argentine data. Using counterfactual simulations of a tariff decline in the textile sector, we show that capital adjustment can create long-run responses of real wages that are larger than the short-run responses. This happens as textile firms disinvest during the transition. We also show that the reduction of tariffs on capital inputs boosts investment and real wages across sectors.

Date: 2022
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