Rigid Labour Markets with Trade and Capital Mobility: Theory and Evidence

Abstract:     
We develop a multi-country model with imperfect labour markets to study the effect of labour market frictions on bilateral trade flows. We use a framework that allows for goods trade and capital mobility and show that labour market imperfections exert opposite effects in the absence of capital mobility (the short run) and its presence (the long run), respectively. In the short run, a higher degree of labour market rigidity decreases the value of total trade, but increases the share of intra-industry trade for a country that is larger than its trading partner. The reverse effects are observed when capital is allowed to cross country borders. Using data on unemployment and income distribution for 23 OECD countries, we compute the central parameter in our theoretical model that describes the degree of labour market rigidity. We use this new empirical concept to provide evidence for our theoretical findings by means of reduced-form regressions as well as simulation results of a calibrated general equilibrium model.

On dveloppe un modle plusieurs pays avec des marchs du travail imparfaits pour tudier leffet des frictions dans les marchs du travail sur les flux de commerce bilatraux. On utilise un cadre analytique qui permet le commerce des biens et la mobilit du capital, et on montre que les imperfections sur le march du travail ont des effets opposs en labsence de mobilit du capital ( court terme) et quand mobilit du capital il y a ( long terme). A court terme, un fort degr de rigidit dans le march du travail rduit la valeur totale du commerce, mais accrot la part du commerce intra-industrie pour le pays qui a une taille plus grande que celle de son partenaire commercial. Les effets inverses sont observs quand on permet au capital de traverser les frontires. A laide de donnes sur le chmage et la rpartition du revenu pour 23 pays de lOCDE, on calcule le paramtre central du modle thorique qui dcrit le degr de rigidit du march du travail. On utilise ce nouveau concept empirique pour tester les rsultats thoriques au moyen de rgressions de formes rduites ainsi quau moyen de simulations dun modle calibr dquilibre gnral.

Number of Pages in PDF File: 32

JEL Classification: F12, F16, J64

Accepted Paper Series