Volatility, Labor Market Flexibility, and the Pattern of Comparative Advantage

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.

Unemployment in an Interdependent World

“…Hence, Egger andKreickemeier (2008, 2009), Eckel and Egger (2009) or Felbermayr, Prat, and Schmerer (2011) concentrate on symmetric countries, so that institutional asymmetries and their cross-country implications cannot be studied. Helpman and Itskhoki (2010) have maintained analytical tractability by introducing a numéraire sector that remains 2 More recently, Cuñat and Melitz (2007) study the eect of cross-country dierences in ring restrictions on patterns of comparative advantage in a Ricardian setting, but they do not address the issue of unemployment.…”

An Elementary Theory of Comparative Advantage

“…Therefore, the high-country would specialize in the low-sector and the low-country in the highsector, which would contradict the log-supermodularity of Q. Log-supermodularity also is at the heart of the recent literature on institutions and trade; see e.g. Acemoglu, Antras, and Helpman (2007), Costinot (2006), Cuñat and Melitz (2006), Levchenko (2007), Matsuyama (2005), Nunn (2007), and Vogel (2007). These papers have…”

“…Acemoglu, Antras, and Helpman (2007), Costinot (2006), Cuñat and Melitz (2006), Levchenko (2007), Matsuyama (2005), Nunn (2007), and Vogel (2007). At a formal level, these papers all share the same fundamental objective: providing micro-theoretical foundations for the log-supermodularity of factor productivity with respect to countries'"institutional quality" and sectors'"institutional dependence", whatever those characteristics may be.…”

International Trade, Factor Mobility and the Persistence of Cultural-Institutional Diversity

“…Comparative advantage based on institutional differences has been investigated for the following settings: financial systems (Beck, 2002;Kletzer and Bardhan, 1987;Ju and Wei, 2005;Matsuyama, 2005;Svaleryd and Vlachos, 2005), enforcement of contracts and property rights (Esfahani and Mookherjee, 1995;Levchenko, 2007;Nunn, 2007), intellectual property rights (Pagano, 2007), contracts and the division of labor (Acemoglu, Antràs and Helpman, 2009;Costinot, 2009), contractual incompleteness and the product cycle (Antràs, 2005), labor market flexibility and volatility (Cunat and Melitz, 2007), legal establishment and accounting systems (Vogel, 2007). In contrast to these papers, rather than studying the effects of exogenously given differences in institutions on comparative advantage and trade, we also consider the impact of economic integration on the endogenous dynamics of institutions.…”