Volatility, labor market flexibility, and the pattern of comparative advantage

Alejandro Cunat and Marc Melitz

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 idiosyncratic shocks. These institutional differences interact with sector specific differences in volatility (the variance 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 higher volatility. Empirical evidence for a large sample of countries strongly supports this theory: the exports of countries with more flexible labor markets are biased towards high-volatility sectors. We show how differences in labor market institutions can be parsimoniously integrated into the workhorse model of Ricardian comparative advantage of Dornbush, Fisher and Samuelson (1977). We also show how our model 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)
Pages: 41 pages
Date: 2007-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
http://eprints.lse.ac.uk/19714/ Open access version. (application/pdf)

Related works:
Journal Article: VOLATILITY, LABOR MARKET FLEXIBILITY, AND THE PATTERN OF COMPARATIVE ADVANTAGE (2012)
Working Paper: Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage (2012)
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)
Working Paper: Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage (2007)
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