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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. Centre for Economic Performance, London School of Economics and Political Science, 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
Library of Congress subject classification: H Social Sciences > HF Commerce
Journal of Economic Literature Classification System: F - International Economics > F1 - Trade
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 799
Date Deposited: 21 Jul 2008 10:08
URL: http://eprints.lse.ac.uk/19714/

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