long-run adjustment costs would be equivalent to a mere 0.046 percent of the discounted value of the gains.

All these papers share a similar methodology. One concern with it is the procedure to transform output loss due to liberalization into employment losses. de Melo and Tarr (1990) improve this procedure with the help of a general equilibrium model. They study the labor adjustment costs associated with the removal of quantitative restrictions on U.S. imports of textiles, steel and automobiles. The approach is general equilibrium in the sense that the analysis incorporates the linkages between these industries and the rest of the economy. The estimates of the cost of adjustment are, as before, small. Few workers, around 0.25 percent of the labor force, would be forced to re-allocate to other sectors. Assuming earning losses for 6 years, de Melo and Tarr estimate adjustment costs equivalent to around 1.5 to 3.6 percent of the gains from liberalization. In a similar setting, but with a partial equilibrium framework, Morkre and Tarr (1980) estimate costs of adjustment of 6.25 percent, 1.47 percent, and 1.75 percent of the gains from liberalization in sugar, footwear, and textiles and apparel, respectively (for the U.S. economy).

# **4.2 Modern Approach**

Most of the work reviewed in the previous section shares a weakness: the relatively crude structure of the transition from job displacement and unemployment into reallocation in the labor force. Assigning the going wage (sometimes conditional on demographics or individual characteristics) to those workers displaced by trade omits the value of unemployment. In other words, it neglects the fact that income or earnings during unemployment are not necessarily zero. There is generally a reservation value because workers can engage in informal work, help at home (home-production activities), perform odd-jobs and so on. Also, the reallocation may be itself costly (beyond forgone income) if workers need to retool themselves to accumulate sector-specific skills. More recent work on trade adjustment costs attempts to better model and quantify these factors and to provide foundations to these issues.

The papers in this literature are heavily structural and the foundations vary from paper to paper. Each of the papers reviewed here focus on different foundations. First, I look at a strand of literature on _labor_ adjustment costs. The drivers of those costs are labor market frictions, sector-specific skills (human capital) and training costs, hiring and firing costs, and labor mobility costs. Second, I look at capital adjustment costs and capital market imperfections. All these paper rely of variants of dynamic stochastic general equilibrium models that are partly calibrated and partly estimated using firm and worker data. In this section, I review the main examples in this literature emphasizing both the size of the cost of adjustment and the role of the driver of those adjustment costs. Table 1 summarizes the main results.

# **4.2.1. Labor Mobility Costs**

I begin my review of the literature with a series of papers on labor mobility costs, namely Cameron, Chaudhuri, and McLaren (2007), Chaudhuri and McLaren (2007), Artuc, Chaudhuri, and McLaren (2010), and Artuc, Chaudhuri, and McLaren (2008). I begin here because the definition of labor mobility costs is broad enough and encompasses many of the channels that I will explore in more detail below.

These papers present a method for estimating the costs of labor mobility based on a dynamic rationalexpectations model of labor adjustment. The procedure also explains how to use the model to simulate 9