Journal Articles
Abstract:
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 large 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 labor market response following trade liberalization but the transition may take
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 for compensating losers,
although at the expense of higher welfare adjustment costs. The experiments also highlight
the sensitivity of the transitional dynamics with respect to assumptions regarding
the mobility of physical capital.