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Trade Shocks and Labor Adjustment: Theory

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  • 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.

Suggested Citation

  • Stephen Cameron & Shubham Chaudhuri & John McLaren, 2007. "Trade Shocks and Labor Adjustment: Theory," NBER Working Papers 13463, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:13463
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    Cited by:

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    2. Ann Harrison & John McLaren & Margaret McMillan, 2011. "Recent Perspectives on Trade and Inequality," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 261-289, September.
    3. Moritz Ritter, 2014. "Offshoring and occupational specificity of human capital," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 780-798, October.
    4. Jeffrey Thompson, 2011. "Costly Migration and the Incidence of State and Local Taxes," Working Papers wp251, Political Economy Research Institute, University of Massachusetts at Amherst.
    5. Erhan Artuç & Shubham Chaudhuri & John McLaren, 2010. "Trade Shocks and Labor Adjustment: A Structural Empirical Approach," American Economic Review, American Economic Association, vol. 100(3), pages 1008-1045, June.
    6. Shubham Chaudhuri & John McLaren, 2007. "Some Simple Analytics of Trade and Labor Mobility," NBER Working Papers 13464, National Bureau of Economic Research, Inc.
    7. Ann Harrison & John McLaren & Margaret S. McMillan, 2010. "Recent Findings on Trade and Inequality," NBER Working Papers 16425, National Bureau of Economic Research, Inc.
    8. Emanuel Ornelas, 2012. "Preferential Trade Agreements and the Labor Market," CEP Discussion Papers dp1117, Centre for Economic Performance, LSE.
    9. Artuç, Erhan & McLaren, John, 2015. "Trade policy and wage inequality: A structural analysis with occupational and sectoral mobility," Journal of International Economics, Elsevier, vol. 97(2), pages 278-294.
    10. Kaplan, David S. & Lederman, Daniel & Robertson, Raymond, 2012. "What drives short-run labor market volatility in offshoring industries ? evidence from northern Mexico during 2007-2009," Policy Research Working Paper Series 6268, The World Bank.
    11. Paolo VERME, 2016. "The Economics Of Forced Displacement: An Introduction," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 44, pages 141-163.
    12. Porto, Guido, 2012. "The cost of adjustment to green growth policies : lessons from trade adjustment costs," Policy Research Working Paper Series 6237, The World Bank.
    13. Gu, Grace & Malik, Samreen & Pozzoli, Dario & Rocha, Vera, 2021. "Worker Reallocation, Firm Innovation, and Chinese Import Competition," Working Papers 9-2021, Copenhagen Business School, Department of Economics.

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    More about this item

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law

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