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

Ramon L. Clarete, Irene Trela, John Whalley

NBER Working Paper No. 4628
Issued in January 1994
NBER Program(s):International Trade and Investment

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.

download in pdf format
   (219 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4628

Users who downloaded this paper also downloaded* these:
Trefler w6209 Immigrants and Natives in General Equilibrium Trade Models
Artuc, Chaudhuri, and McLaren w13465 Trade Shocks and Labor Adjustment: A Structural Empirical Approach
Adams w5940 Technology, Trade, and Wages
Feenstra and Hanson w8372 Global Production Sharing and Rising Inequality: A Survey of Trade and Wages
Piggott and Whalley w6349 VAT Base Broadening, Self Supply, and The Informal Sector
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us