Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage
Alejandro Cuñat
University of Essex - Department of Economics
Marc J. Melitz
Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
April 2007
NBER Working Paper No. w13062
Abstract:
This paper studies the link between volatility, labor market flexibility, and international trade. International differences in labor market regulations affect how firms can adjust to idiosyncratic shocks. These institutional differences interact with sector specific differences in volatility (the variance of the firm-specific shocks in a sector) to generate a new source of comparative advantage. Other things equal, countries with more flexible labor markets specialize in sectors with higher volatility. Empirical evidence for a large sample of countries strongly supports this theory: the exports of countries with more flexible labor markets are biased towards high-volatility sectors. We show how differences in labor market institutions can be parsimoniously integrated into the workhorse model of Ricardian comparative advantage of Dornbusch, Fischer, and Samuelson (1977). We also show how our model can be extended to multiple factors of production.
Number of Pages in PDF File: 39
working papers series
Suggested Citation
Cuñat, Alejandro and Melitz, Marc J., Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage (April 2007). NBER Working Paper No. w13062. Available at SSRN: http://ssrn.com/abstract=986912
