Trade Dynamics with Sector-Specific Human Capital

47 Pages Posted: 2 Jun 2014

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: February 2014

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 (February 2014). CEPR Discussion Paper No. DP9835. Available at SSRN: https://ssrn.com/abstract=2444836

Adam M. Guren (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

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

David Hemous

University of Zürich ( email )

Zürich
Switzerland

Morten Olsen

University of Copenhagen ( email )

Copenhagen
Copenhagen
Denmark

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