Evaluating Labour Adjustment Costs from Trade Shocks: Illustrations for the U.S. Economy Using an Applied General Equilibrium Model with Transactions

24 Pages Posted: 26 Dec 2000 Last revised: 26 Aug 2022

See all articles by Ramon L. Clarete

Ramon L. Clarete

University of the Philippines, Los Baños - School of Economics

Irene Trela

University of Western Ontario - Department of Economics

John Whalley

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)

Date Written: January 1994

Abstract

This paper presents a general equilibrium approach to calculating labour adjustment costs induced by trade policy changes or external sector shocks, which we illustrate by analyzing the adjustment consequences of eliminating quotas and tariffs on U.S. imports. In our approach, factor adjustments in the presence of transactions costs are endogenously determined within the equilibrium structure. The conventional way of calculating such labour adjustment costs is to use full equilibrium models which exclude adjustment costs, and apply exogenous estimates of duration of unemployment to implied intersectoral labour reallocations. By using an equilibrium model in which adjustment costs are absent, the conventional approach tends to overstate the amount of labour that moves to other sectors and hence introduces an upward bias to estimates of adjustment costs. As well, such an approach tends to ignore the impact on intersectoral wage rates. Our results suggest that concerns over adjustment problems should focus as much on the consequences of adjustment costs in impeding factor mobility, as on the magnitude of the adjustment costs themselves. Compared to the redistributive effects they induce by inhibiting labour movement in response to policy or other changes, these costs may be small.

Suggested Citation

Clarete, Ramon L. and Trela, Irene and Whalley, John, Evaluating Labour Adjustment Costs from Trade Shocks: Illustrations for the U.S. Economy Using an Applied General Equilibrium Model with Transactions (January 1994). NBER Working Paper No. w4628, Available at SSRN: https://ssrn.com/abstract=254527

Ramon L. Clarete (Contact Author)

University of the Philippines, Los Baños - School of Economics

Quezon City, Diliman
Philippines

Irene Trela

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada
(519) 661-2111, ext. 85054 (Phone)

John Whalley

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada
519-661-3509, ext. 83509 (Phone)
519-661-3666 (Fax)

HOME PAGE: http://www.ssc.uwo.ca/economics/faculty/

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for International Governance and Innovation (CIGI) ( email )

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Canada

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