Journal Article

TRADE LIBERALIZATION AND LABOR MARKET DYNAMICS

Dix-Carneiro, Rafael

2014

Overview

This paper estimates a structural dynamic equilibrium model of the Brazilian labor market in order to study trade-induced transitional dynamics. The model features a multi-sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector-specific experience, and costly switching of sectors. The model's estimates yield median costs of mobility ranging from 1.4 to 2.7 times annual average wages, but a high dispersion of these costs across the population. In addition, sector-specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model for counterfactual trade liberalization experiments, the main findings are: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly reduced due to the delayed adjustment; (3) trade-induced welfare effects depend on initial sector of employment and on worker demographics such as age and education. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of capital.

• Publisher: Econometric Society,Blackwell Publishing Ltd
• Subject: Accumulation / adjustment costs / Capital / Capital mobility / Cost estimation models / Delayed / Demography / distributional effects of trade policy / Education / Employment / Endogenous / Equilibrium / Equilibrium models / Estimation / Experiments / Free trade / Human capital / Labor market / labor market dynamics / Labor markets / Labour market / Liberalization / Manufacturing industries / Mobility / Overlapping-generations model / Price shocks / Retraining / Structural capital / Studies / Trade / Trade liberalization / Wages / Welfare / worker heterogeneity / Workers