potential increase in welfare by the second year, 15 percent by the third year, 13 percent by the fifth year and 13 percent by the seventh year.<sup>9</sup> I want to emphasize the fact that labor market reforms affect the steady state of the economy and that this fact has implications for the interpretation and qualification of the costs of adjustment. Note that this model has two types of labor market imperfections. One is the costs of firing and hiring and the other is the specificity of human capital and its accumulation via production/learning. In the experiments, the author works with a trade reform and with a labor market reform, but the specificity of human capital remains in place. This creates a dynamic adjustment, even when the economy is fully liberalized. That is to say, the elimination of both trade and labor imperfections does not make the economy jump from the distorted steady state to the non-distorted steady state. Instead, the economy starts a dynamic path as workers accumulate human capital and switch sectors. Taking into account this transition, Kambourov reports welfare gains from the trade reform only of 7.3 percent (as opposed to 8.8 percent) and welfare gains from the joint reform of trade and labor markets of 8.1 (as opposed to 9.5 percent). Human capital specificity is thus playing an important role.<sup>10</sup> It is also plausible to argue that the full elimination of firing/trade costs is unfeasible, not only politically but also perhaps technologically. This should be kept in mind when assessing the costs of adjustments, because the counterfactual welfare levels used in the calculations of the trade adjustment costs may depend on complementary factors that may be costly to achieve (such as full labor market flexibility).

Kambourov also studies the case of Mexico, a country with a less flexible labor market than Chile. The trade reform was, in turn, gradual and thus the author simulates an economy in which tariffs are initially halved and later eliminated completely after three years. The results are qualitatively very similar to the Chilean experience. Eliminating trade distortions increases welfare by 5.8 percent while eliminating trade and labor market distortions, by 6.1 percent. As before trade reforms seem to have larger impacts on the steady state than labor market reforms. Further, there are foregone benefits from not liberalizing the labor market jointly with the international trade market.

# **4.2.4. Labor Mobility Costs and Worker Sector-Specific Experience**

Dix-Carneiro (2010) estimates a dynamic structural model of the labor market with labor mobility costs and worker sector-specific experience using Brazilian data. Labor demand is given by the value of the marginal productivity of labor in perfectly competitive sectors without frictions. The labor supply side features overlapping generations of heterogeneous workers who, as in Artuc, Chaudhuri and McLaren (2010) can switch sectors at a cost. Dix-Carneiro offers a very rich model with several nice additions to the labor mobility cost model of Artuc et al. Workers are heterogeneous in various dimensions, they can

> 9 If the increase in welfare, after 2 years, with both labor and trade reforms is 6.4 percent and the increase in welfare, after 2 years, with only trade reform is only 5.7 percent, then the labor reform brings about additional gains of 0.7 percent, after 2 years, or 11 percent of 6.4.

> 10 Note that fully addressing the role of human capital requires modifying the model to eliminate human capital specificity. This, in turn, requires recalculating the steady states and the transition. Kambourov (2009) does this in section 6.3 of the paper: ``The results from this experiment suggest that both firing costs and human capital play a role in the benchmark analysis. Firing costs do play an important role since in both models they slow down the intersectoral reallocation of workers and reduce the benefits from a trade reform. Human capital, however, does play a role as well − in the absence of human capital, the foregone benefits from not liberalizing the labor market are less than half of what they are in the benchmark case.’’

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