Trade Shocks and Labor Adjustment: A Structural Empirical Approach

Erhan Artuc, Shubham Chaudhuri, John McLaren

NBER Working Paper No. 13465
Issued in October 2007
NBER Program(s):International Trade and Investment, Labor Studies

The welfare effects of trade shocks depend crucially on the nature and magnitude of the costs workers face in moving between sectors. The existing trade literature does not directly address this, assuming perfect mobility or complete immobility, or adopting reduced-form approaches to estimation. We present a model of dynamic labor adjustment that does, and which is, moreover, consistent with a key empirical fact: that intersectoral gross flows greatly exceed net flows. Using an Euler-type equilibrium condition, we estimate the mean and the variance of workers' switching costs from the U.S. March Current Population Surveys. We estimate high values of both parameters, implying both slow adjustment of the economy, and sharp movements in wages, in response to a trade shock. Simulations of a trade liberalization indicate that despite the high estimated adjustment cost, in terms of lifetime welfare, the liberalization is Pareto-improving. The explanation for this surprising finding -- which would be missed by a reduced-form approach -- is that the high variance to costs ensures high rates of gross flow; this helps spread the liberalization's benefits around.

download in pdf format
   (399 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13465

Published: Erhan Artuc & Shubham Chaudhuri & John McLaren, 2010. "Trade Shocks and Labor Adjustment: A Structural Empirical Approach," American Economic Review, American Economic Association, vol. 100(3), pages 1008-45, June. citation courtesy of

Users who downloaded this paper also downloaded* these:
Cameron, Chaudhuri, and McLaren w13463 Trade Shocks and Labor Adjustment: Theory
Chaudhuri and McLaren w13464 Some Simple Analytics of Trade and Labor Mobility
Menezes-Filho and Muendler w17372 Labor Reallocation in Response to Trade Reform
Caliendo, Dvorkin, and Parro w21149 The Impact of Trade on Labor Market Dynamics
Autor, Dorn, and Hanson w18054 The China Syndrome: Local Labor Market Effects of Import Competition in the United States
NBER Videos

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

Contact Us