Trade Shocks and Labor Adjustment: A Structural Empirical Approach

52 Pages Posted: 15 Oct 2007 Last revised: 3 Aug 2010

See all articles by Erhan Artuc

Erhan Artuc

Koc University - Department of Economics; World Bank - International Trade Division

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

The welfare effects of trade shocks depend crucially on the nature and magnitude of the costs workers face in moving between sectors. The existing trade literature does not directly address this, assuming perfect mobility or complete immobility, or adopting reduced-form approaches to estimation. We present a model of dynamic labor adjustment that does, and which is, moreover, consistent with a key empirical fact: that intersectoral gross flows greatly exceed net flows. Using an Euler-type equilibrium condition, we estimate the mean and the variance of workers' switching costs from the U.S. March Current Population Surveys. We estimate high values of both parameters, implying both slow adjustment of the economy, and sharp movements in wages, in response to a trade shock. Simulations of a trade liberalization indicate that despite the high estimated adjustment cost, in terms of lifetime welfare, the liberalization is Pareto-improving. The explanation for this surprising finding -- which would be missed by a reduced-form approach -- is that the high variance to costs ensures high rates of gross flow; this helps spread the liberalization's benefits around.

Suggested Citation

Artuc, Erhan and Chaudhuri, Shubham and McLaren, John, Trade Shocks and Labor Adjustment: A Structural Empirical Approach (October 2007). NBER Working Paper No. w13465. Available at SSRN: https://ssrn.com/abstract=1019763

Erhan Artuc

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910, Istanbul
Turkey

World Bank - International Trade Division ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Shubham Chaudhuri (Contact Author)

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

420 W. 118th Street
MC-3308
New York, NY 10027
United States
212-854-4661 (Phone)
212-854-5765 (Fax)

World Bank - East Asia and Pacific Region ( email )

Washington, DC 20433
United States

John McLaren

University of Virginia ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States
434-924-3994 (Phone)
434-982-2904 (Fax)

NBER

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