Labour Market Regulations and the Sectoral Reallocation of Workers: The Case of Trade Reforms

Abstract

In this paper I highlight the importance of incorporating the institutional features of local labour markets into the analysis of trade reforms. A trade reform is often deemed beneficial because the elimination of trade barriers allows labour to reallocate towards those sectors in the economy in which the country has a comparative advantage. The amount and speed of the reallocation, however, and the post-reform behaviour of output, productivity and welfare, will depend on how regulated the labour market is. First, I document that high firing costs slow down the intersectoral reallocation of labour after a trade reform. Second, in order to isolate the effect of firing costs on labour reallocation, output and welfare after a trade reform, I build a dynamic general equilibrium model. I find that if a country does not liberalize its labour market at the outset of its trade reform, the intersectoral reallocation of workers will be 30% slower, and as much as 30% of the gains in real output and labour productivity in the years following the trade reform will be lost. From a policy standpoint, the message is that while trade reforms are desirable, they need to be complemented by labour market reforms in order to be fully successful.

Labor Reallocation in Response to Trade Reform

“…In models by Kambourov (2009) and Helpman, Itskhoki and Redding (2010), for instance, the reallocation of workers following trade liberalization depends on the country's labor market institutions, such as firing costs and search frictions. 5 For the United States, Artuç, Chaudhuri and McLaren (2010) show in structural estimation that sizable switching costs for individual workers between job locations dampen mobility after trade shocks.…”

Critical Success Factors for International Competitiveness Indeveloping Countriesthrough Marketing: Lessons for Oman

“…Their natural destination is other GCC countries without these restrictions and look at the growth figures there -fantastic (food for thought for Oman). If a country does not liberalize its labour market at the outset of its trade reform, the inter-sectoral reallocation of workers will be 30% slower, and as much as 30% of the gains in real output and labourproductivity in the years following the trade reform will be lost, Kambourov(2009). National 1388 economies are driven by skilled labour which no country can afford to lose.…”

“…Oman has good trading relations with the world. If a country does not liberalize its labour market at the outset of its trade reform, the inter-sectoral reallocation of workers will be 30% slower, and as much as 30% of the gains in real output and labour productivity in the years following the trade reform will be lost, Kambourov(2009). From a policy standpoint, the message is that while trade reforms are desirable, they need to be complemented by labour market reforms in order to be fully successful.…”

Trade Liberalization and Labor Market Dynamics

“…These costs may also capture other barriers to mobility that are not included in the model such as geographic mobility costs, search and matching frictions, and/or rms' ring and hiring costs (see Kambourov (2009) It is important to notice that the model features three distinct sources of barriers to mobility. One works directly through direct wage eects of moving: sector-specic experience may not be fully transferable across sectors.…”