Intra-Industry Trade Expansion and Adjustment Cost in the Estonian Labor Market in 2008–2022

In recent decades, globalization has brought about significant changes in the landscape of international trade. These shifts in trade patterns have caused a reorganization of production resources, both within and across various economic sectors. Consequently, this process of reallocation results in adjustment costs. This study explores the connection between trade expansion and the costs associated with labor market adjustments. We focus on the smooth adjustment hypothesis, which proposes that increased intra-industry trade leads to lower labor adjustment costs. To investigate this, we employ an empirical model that analyses the impact of both intra-industry and inter-industry trade development on changes in employment within Estonian manufacturing sectors. We utilize these employment changes as a proxy for labor market adjustment costs. The analysis leverages panel data encompassing trade, employment, labor productivity, demand, and trade openness variables for 17 manufacturing sectors across the period 2007–2022. We employ a fixed-effects model for the analysis. Our findings provide support for the smooth adjustment hypothesis within the Estonian context during the examined timeframe. Additionally, a positive association emerged between changes in sectoral labor productivity and employment. These results suggest that, in Estonia, the increased competition driven by trade expansion played a significant role in labor market adjustments. However, other control variables specifically trade openness and changes in sectoral demand were not statistically significant.