Trade Dynamics with Sector-Specific Human Capital

22 Pages Posted: 11 Jul 2013 Last revised: 3 Nov 2016

See all articles by Adam M. Guren

Adam M. Guren

Boston University - Department of Economics

David Hémous

University of Zürich

Morten Olsen

University of Copenhagen

Multiple version iconThere are 2 versions of this paper

Date Written: January 26, 2015

Abstract

This paper develops a dynamic Heckscher Ohlin Samuelson model with sector-specific human capital and overlapping generations to characterize the dynamics and welfare implications of gradual labor market adjustment to trade. Our model is tractable enough to yield sharp analytic results, that complement and clarify an emerging empirical literature on labor market adjustment to trade. Existing generations that have accumulated specific human capital in one sector can switch sectors when the economy is hit by a trade shock. Nonetheless, the shock induces few workers to switch, generating a protracted adjustment that operates largely through the entry of new generations. This results in wages being tied to the sector of employment in the short-run but to the skill type in the long-run. Relative to a world with general human capital, welfare is improved for the skill group whose type-intensive sector shrinks. We extend the model to include physical capital and show that the transition is longer when capital is mobile. We also introduce nonpecuniary sector preferences and show that larger gross flows are associated with a longer transition.

Keywords: Sector-specific Human Capital, Trade Shock, Transitional Dynamics, Worker Mobility

JEL Classification: E24, F11, F16, J24

Suggested Citation

Guren, Adam M. and Hemous, David and Olsen, Morten, Trade Dynamics with Sector-Specific Human Capital (January 26, 2015). INSEAD Working Paper No. 2013/62/EPS; IESE Business School Working Paper No. 05/2013. Available at SSRN: https://ssrn.com/abstract=2292416 or http://dx.doi.org/10.2139/ssrn.2292416

Adam M. Guren

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

HOME PAGE: http://people.bu.edu/guren/

David Hemous (Contact Author)

University of Zürich ( email )

Zürich
Switzerland

Morten Olsen

University of Copenhagen ( email )

Copenhagen
Copenhagen
Denmark

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