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American Economic Review: Vol. 100 No. 3 (June 2010)

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Trade Shocks and Labor Adjustment: A Structural Empirical Approach

Article Citation

Artuç, Erhan, Shubham Chaudhuri, and John McLaren. 2010. "Trade Shocks and Labor Adjustment: A Structural Empirical Approach." American Economic Review, 100(3): 1008-45.

DOI: 10.1257/aer.100.3.1008

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.(JEL E24, F13, F16)

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Authors

Artuç, Erhan (Koc U)
Chaudhuri, Shubham (World Bank)
McLaren, John (U VA)

JEL Classifications

E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
F13: Trade Policy; International Trade Organizations
F16: Trade and Labor Market Interactions


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