A New Approach to Labor Mobility in CGE Models with Application to an Archetype SSA Country

Hans Lofgren and Martín Cicowiez

No 332797, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: Labor mobility may have a strong impact on the effects of policy changes. In this paper, we present and test an innovative approach to moblity that draws on Dantzig’s transportation model and the product-space (PS) literature, and apply it to a CGE model and database for a Sub-Saharan African (SSA) economy. The essence of our approach is that labor has sector-specific capabilities. Labor that moves is less effective than the labor that already works in the receiving sector. The smaller the differences between sector capabilities, the higher their proximity (as defined in the PS literature). If labor moves to a new location, the effective labor quantity received in the destination sector falls short of the effective (and physical) quantity of labor that leaves the origin sector; the longer the distance (the lower the proximity), the larger this shortfall. Profit-maximizing producers consider the gap between effective and physical labor in their decisions. Over time, the sectoral allocation of labor may evolve due to learning by doing. A key feature of this treatment is that it, realistically, views labor segmentation along a continuum as opposed to the dichotomy of treating labor in different sectors as belonging either to the same segment or to different, separate segments. Our approach is consistent with alternative treatments of other aspects of labor markets, including the determination of total employment for each labor type, the units used for labor, and substitutability between labor typess within sectors. The PS literature provides a default approach for the definition of proximity data but other options may be considered. This treatment provides a means of avoiding excessive short-run adjustments in labor force allocation in response to economic shocks. The paper presents our approach in comparison with others, tests it in comparative-static simulations of the effects of export price shocks for food with alternative labor market parameterizations.

Keywords: Labor; and; Human; Capital (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:332797

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