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DECTI Trade Seminar: Trade Liberalization and Labor Market Dynamics

Location:   MC3-101
Begins:   Oct 22, 2010 14:30
Ends:   Oct 22, 2010 16:00
Contact Person:   Yasmin D Souza

Speaker: Rafael Carneiro, Princeton University

Description: This paper studies trade-induced transitional dynamics by estimating a structural
dynamic equilibrium model of the labor market. The model features a multi-sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector-specific experience and costly switching of sectors. The estimation employs a unique panel of workers constructed from Brazilian matched employer-employee data. The model’s estimates yield high average costs of mobility that are very dispersed across the population. In addition, sector-specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model as a laboratory for counterfactual experiments, this paper finds that: (1) there is a large response of the labor market following trade liberalization but the transition may last several years; (2) potential aggregate welfare gains are significantly mitigated due to the slow adjustment; (3) trade-induced welfare effects are very heterogeneous across the population; (4) retraining workers initially employed in the adversely affected sector may reduce losses incurred by these workers and increase aggregate welfare; (5) a moving subsidy that covers costs of mobility is more promising in compensating losers, although at the expense of higher adjustment costs. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of physical capital.

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