Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage / Alejandro Cuñat, Marc J. Melitz.

Format:

Book

Author/Creator:

Cuñat, Alejandro.

Contributor:

National Bureau of Economic Research.

Melitz, Marc J.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13062.

NBER working paper series no. w13062

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

This paper studies the link between volatility, labor market flexibility, and international trade. International differences in labor market regulations affect how firms can adjust to idiosyncratic shocks. These institutional differences interact with sector specific differences in volatility (the variance of the firm-specific shocks in a sector) to generate a new source of comparative advantage. Other things equal, countries with more flexible labor markets specialize in sectors with higher volatility. Empirical evidence for a large sample of countries strongly supports this theory: the exports of countries with more flexible labor markets are biased towards high-volatility sectors. We show how differences in labor market institutions can be parsimoniously integrated into the workhorse model of Ricardian comparative advantage of Dornbusch, Fischer, and Samuelson (1977). We also show how our model can be extended to multiple factors of production.

Notes:

Print version record

April 2007.