Working Paper: NBER ID: w13062
Authors: Alejandro Cuat; Marc J. Melitz
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 Dornbusch, Fischer, and Samuelson (1977). We also show how our model can be extended to multiple factors of production.
Keywords: labor market flexibility; comparative advantage; international trade; volatility
JEL Codes: F1; F16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor market flexibility (J48) | Concentration of exports in high-volatility sectors (F14) |
| Sector volatility (G17) | Concentration of exports in high-volatility sectors (F14) |
| Interaction between labor market flexibility and sector volatility (J69) | Export patterns (F10) |
| Rigid labor markets (J48) | Comparative disadvantage in high variance sectors (F12) |
| Capital intensity (E22) | Moderates relationship between labor market flexibility and sector volatility (J48) |