Trade Shocks and Labor Adjustment: Theory

46 Pages Posted: 15 Oct 2007 Last revised: 30 Nov 2007

See all articles by Stephen V. Cameron

Stephen V. Cameron

Columbia University - School of International & Public Affairs (SIPA)

Shubham Chaudhuri

Columbia University, Graduate School of Arts and Sciences, Department of Economics; World Bank - East Asia and Pacific Region

John McLaren

University of Virginia; NBER

Date Written: October 2007

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

Cameron, Stephen and Chaudhuri, Shubham and McLaren, John, Trade Shocks and Labor Adjustment: Theory (October 2007). NBER Working Paper No. w13463. Available at SSRN: https://ssrn.com/abstract=1019761

Stephen Cameron (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

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Shubham Chaudhuri

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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New York, NY 10027
United States
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World Bank - East Asia and Pacific Region ( email )

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John McLaren

University of Virginia ( email )

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Charlottesville, VA 22904-4182
United States
434-924-3994 (Phone)
434-982-2904 (Fax)

NBER

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