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Mobility costs and the dynamics of labor market adjustment to external shocks: Theory

Shubham Chaudhuri; Stephen Cameron; John McLaren

Title:
Mobility costs and the dynamics of labor market adjustment to external shocks: Theory
Author(s):
Chaudhuri, Shubham
Cameron, Stephen
McLaren, John
Date:
Type:
Working papers
Department:
Economics
Permanent URL:
Series:
Department of Economics Discussion Papers
Part Number:
0102-53
Publisher:
Department of Economics, Columbia University
Publisher Location:
New York
Abstract:
We construct a dynamic, stochastic rational expectations model of labor reallocation that is designed so that its key parameters can be estimated for trade policy analysis. A key feature is the presence of time-varying idiosyncratic moving costs faced by workers. As a consequence of these shocks: (i) gross flows exceed net flows (an important feature of empirical labor movements); (ii) the economy features gradual and anticipatory adjustment to aggregate shocks; (iii) wage differentials across locations or industries can persist in the steady state; and (iv) the normative implications of policy can be very different from a model without idiosyncratic shocks, even when the aggregate behavior of both models is similar. It is shown that the solution to a particular planner's problem yields a competitive equilibrium, thus facilitating the analysis and simulation of the model for policy purposes.
Subject(s):
Economic theory
Item views:
218
Metadata:
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