Working Paper: NBER ID: w13464
Authors: Shubham Chaudhuri; John McLaren
Abstract: We study a simple, tractable model of labor adjustment in a trade model that allows us to analyze the economy's dynamic response to trade liberalization. Since it is a neoclassical market-clearing model, we can use duality techniques to study the equilibrium, and despite its simplicity a rich variety of properties emerge. The model generates gross flows of labor across industries, even in the steady state; persistent wage differentials across industries; gradual adjustment to a liberalization; and anticipatory adjustment to a pre-announced liberalization. Pre-announcement makes liberalization less attractive to export-sector workers and more attractive to import-sector workers, eventually making workers unanimous either in favor of or in opposition to liberalization. Based on these results, we identify many pitfalls to conventional methods of empirical study of trade liberalization that are based on static models.
Keywords: trade liberalization; labor mobility; dynamic adjustment; wage differentials; anticipatory effects
JEL Codes: F16; F23; J60; J7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | gross flows of labor across sectors (J69) |
| trade policy changes (F13) | labor market adjustments (J48) |
| changes in trade policy (F13) | wage structures (J31) |
| announced liberalizations (E69) | shifts in labor flows before policy takes effect (J68) |
| communication of policy changes (L98) | labor sentiment (J89) |