Mobility costs and the dynamics of labor market adjustment to external shocks: Theory
- Mobility costs and the dynamics of labor market adjustment to external shocks: Theory
- Chaudhuri, Shubham
- Persistent URL:
- Department of Economics Discussion Papers
- Part Number:
- April 2002
- Department of Economics, Columbia University
- Publisher Location:
- New York
- 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.
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- Suggested Citation:
- Shubham Chaudhuri, Stephen Cameron, John McLaren, 2002, Mobility costs and the dynamics of labor market adjustment to external shocks: Theory, Columbia University Academic Commons, https://doi.org/10.7916/D88S524Z.