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American Economic Review Vol. 100 No. 3 2010

Trade Shocks and Labor Adjustment: A Structural Empirical Approach

Erhan Artuç1; Shubham Chaudhuri2; John McLaren3

1 Koç University, Department of Economics, Rumelifeneri Yolu, Sariyer, 34450, Istanbul, Turkey. · 2 East Asia and Pacific Poverty Reduction and Economic Management Department, The World Bank, 1818 H Street, NW, Washington, DC 20433. · 3 Department of Economics, University of Virginia, P.O. Box 400182, Charlottesville, VA 22904.

Abstract

The welfare effects of trade shocks turn on the nature and magnitude of the costs workers face in moving between sectors. Using an Euler-type equilibrium condition derived from a rational expectations model of dynamic labor adjustment, we estimate the mean and variance of workers' switching costs from the US CPS. We estimate high values of both parameters, implying slow adjustment of the economy and sharp movements in wages in response to trade shocks. However, import-competing workers can still benefit from tariff removal; liberalization lowers their wages in the short and long run but raises their option value.

DOI
10.1257/aer.100.3.1008
Volume
100
Issue
3
Pages
1008-1045
Language
en
Sources
openalex bibtex:phds-export.bib crossref

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