Working Paper: NBER ID: w4628
Authors: Ramon L. Clarete; Irene Trela; John Whalley
Abstract: This paper presents a general equilibrium approach to calculating labour adjustment costs induced by trade policy changes or external sector shocks, which we illustrate by analyzing the adjustment consequences of eliminating quotas and tariffs on U.S. imports. In our approach, factor adjustments in the presence of transactions costs are endogenously determined within the equilibrium structure. The conventional way of calculating such labour adjustment costs is to use full equilibrium models which exclude adjustment costs, and apply exogenous estimates of duration of unemployment to implied intersectoral labour reallocations. By using an equilibrium model in which adjustment costs are absent, the conventional approach tends to overstate the amount of labour that moves to other sectors and hence introduces an upward bias to estimates of adjustment costs. As well, such an approach tends to ignore the impact on intersectoral wage rates. Our results suggest that concerns over adjustment problems should focus as much on the consequences of adjustment costs in impeding factor mobility, as on the magnitude of the adjustment costs themselves. Compared to the redistributive effects they induce by inhibiting labour movement in response to policy or other changes, these costs may be small.
Keywords: Labor Adjustment Costs; Trade Policy; General Equilibrium Model
JEL Codes: F1; J6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade policy changes (F13) | labor adjustment costs (J39) |
| adjustment costs (J30) | factor mobility (J62) |
| adjustment costs (J30) | wage rates (J31) |
| trade shocks (F14) | relative wages between sectors (J31) |
| trade shocks (F14) | intersectoral labor reallocations (F16) |
| adjustment costs (J30) | number of workers moving between sectors (J69) |
| adjustment costs (J30) | adjustment costs calculated using conventional methods (C51) |