Working Paper: NBER ID: w13463
Authors: Stephen Cameron; Shubham Chaudhuri; John McLaren
Abstract: We construct a dynamic, stochastic rational expectations model of labor reallocation within a trade model that is designed so that its key parameters can be estimated for trade policy analysis. A key feature is the presence of time-varying idiosyncratic moving costs faced by workers. As a consequence of these shocks: (i) Gross flows exceed net flows (an important feature of empirical labor movements); (ii) the economy features gradual and anticipatory adjustment to aggregate shocks; (iii) wage differentials across locations or industries can persist in the steady state; and (iv) the normative implications of policy can be very different from a model without idiosyncratic shocks, even when the aggregate behaviour of both models is similar. It is shown that the equilibrium solves a particular planner's problem, thus facilitating analytical results, econometric estimation, and simulation of the model for policy analysis.
Keywords: trade shocks; labor adjustment; idiosyncratic moving costs; policy analysis
JEL Codes: F16; F42; J60; K11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade shocks (F14) | labor reallocation (J69) |
| higher mobility costs (J62) | reduced efficiency gains from trade (F12) |
| idiosyncratic shocks (D89) | wage differentials (J31) |
| idiosyncratic preferences and market conditions (D11) | persistent wage differentials (J31) |
| labor allocation decisions (J29) | GDP maximization (E20) |
| idiosyncratic preferences (D11) | suboptimal economic outcomes (D69) |