Trade Shocks and Labor Adjustment: An Empirical Model


We present a model of dynamic adjustment by workers to labor-demand shocks such as trade shocks. Using an Euler-type equilibrium condition de-rived from the model, we then estimate its structural parameters. The key parameters are the mean and variance of the cost to a worker of moving from one industry to another. Our estimates indicate high values of both parame-ters, implying slow adjustment of the economy, and sharp movements in wages, in response to a trade shock. Simulations of an example trade liberalization indeed show gradual adjustment with sharp effects on wages, but surprisingly the liberalization is Pareto-improving, despite the high estimated adjustment cost. The explanation is that the high variance to costs ensures high rates of gross flow. This helps to spread the benefits of the liberalization around. Very Preliminary and Incomplete. 1 Introduction. Perhaps the one question facing trade economists with the most urgency is the effec

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