NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Trade Shocks and Labor Adjustment: Theory

Stephen Cameron, Shubham Chaudhuri, John McLaren

NBER Working Paper No. 13463
Issued in October 2007
NBER Program(s):   ITI   LS

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.

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Document Object Identifier (DOI): 10.3386/w13463

Published: "Trade Shocks and Labor Adjustment: A Structural Empirical Approach.” Joint with Erhan Artuç and Shubham Chaudhuri. American Economic Review, June 2010.

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