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

Chaudhuri, Shubham; Cameron, Stephen; McLaren, John

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.



More About This Work

Academic Units
Department of Economics, Columbia University
Department of Economics Discussion Papers, 0102-53
Published Here
March 22, 2011


April 2002