Volatility, labor market flexibility, and the pattern of comparative advantage
By: Alejandro Cuñat and Marc J. Melitz
Contributors: Melitz, Marc J.; London School of Economics and Political Science. Centre for Economic Performance
Series: CEP discussion paper -- no. 799
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2007
Place of publication: London
Language: eng
Format: [electronic resource] /
Description: 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.
Notes: Title from publisher's abstract page (viewed on July 6, 2007).

"June 2007."

Includes bibliographical references.

Also available in print.

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