Working Paper: CEPR ID: DP6297
Authors: Alejandro Cuat; Marc J. Melitz
Abstract: This paper studies the link between volatility, labour market flexibility, and international trade. International differences in labour 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 labour 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 labour market institutions can be parsimoniously integrated into the workhorse model of Ricardian comparative advantage of Dornbusch, Fischer, and Samuelson (1977). We also show how our model can be extended to multiple factors of production.
Keywords: Comparative Advantage; Labour Market Flexibility
JEL Codes: F1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labour market flexibility (J48) | sectoral volatility (L16) |
| labour market flexibility (J48) | comparative advantage in high-volatility sectors (F12) |
| sectoral volatility (L16) | export shares in volatile sectors (G10) |
| capital intensity (E22) | comparative advantage driven by labour market flexibility (F16) |
| volatility increases (E32) | comparative advantage of flexible economies (F12) |