Volatility, labor market flexibility, and the pattern of comparative advantage

Cunat, Alejandro and Melitz, Marc J. (2007) Volatility, labor market flexibility, and the pattern of comparative advantage. CEPDP (799). London School of Economics and Political Science. Centre for Economic Performance, London, UK. ISBN 9780853281757

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Abstract

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 Dornbush, Fisher and Samuelson (1977). We also show how our model can be extended to multiple factors of production.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk
Additional Information:	© 2007 the authors
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HF Commerce
JEL classification:	F - International Economics > F1 - Trade
Date Deposited:	21 Jul 2008 10:08
Last Modified:	13 Sep 2024 20:02
URI:	http://eprints.lse.ac.uk/id/eprint/19714

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