Working Paper: CEPR ID: DP9835
Authors: Adam Guren; David Hemous; Morten Olsen
Abstract: This paper develops a dynamic Heckscher Ohlin Samuelson model with sector-specific human capital and overlapping generations to characterize the dynamics and welfare implications of gradual labor market adjustment to trade. Our model is tractable enough to yield sharp analytic results, that complement and clarify an emerging empirical literature on labor market adjustment to trade. Existing generations that have accumulated specific human capital in one sector can switch sectors when the economy is hit by a trade shock. Nonetheless, the shock induces few workers to switch, generating a protracted adjustment that operates largely through the entry of new generations. This results in wages being tied to the sector of employment in the short-run but to the skill type in the long-run. Relative to a world with general human capital, welfare is improved for the skill group whose type-intensive sector shrinks. We extend the model to include physical capital and show that the transition is longer when capital is mobile. We also introduce nonpecuniary sector preferences and show that larger gross flows are associated with a longer transition.
Keywords: sector-specific human capital; trade shock; transitional dynamics; worker mobility
JEL Codes: E24; F11; F16; J24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade shock (F14) | Labor reallocation (J29) |
| Trade shock (F14) | Wage changes (J31) |
| Labor reallocation (J29) | Wage changes (J31) |
| Accumulation of sector-specific human capital (J24) | Rigidities in labor mobility (J69) |
| Trade shock (F14) | Long-term adjustments align with skill types (J24) |
| Slower adjustment process (F32) | Benefits low-skill workers in shrinking sector (J68) |
| Policies for worker transitions (J68) | Harm low-skill workers who do not switch (F66) |
| Policies for worker transitions (J68) | Reduce aggregate lifetime income of low-skill workers (F66) |