Journal Article

Globalization and labour-market adjustment: how fast and at what cost?

C Davidson and SJ Matusz

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 16, issue 3, pages 42-56
Published in print September 2000 | ISSN: 0266-903X
Published online September 2000 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/16.3.42
Globalization and labour-market adjustment: how fast and at what cost?

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In this paper we argue that the flexibility of an economy's labour market plays a role in determining the gains from trade liberalization, the level of short-run adjustment costs, and the relative value of these two measures. To do so, we describe the model introduced in Davidson and Matusz (2000) which allows us to solve for adjustment costs when workers vary according to ability and jobs differ in terms of the skills that they require. We then report results based on simulations of this model. We find that economies with sluggish labour markets have the least to gain from liberalization. The reason is that while the removal of trade barriers creates large benefits, they are almost completely offset by large short-run adjustment costs. In contrast, we find that with either very flexible or very slothful labour market gains from liberalization are always significantly larger than the short-run adjustment costs.

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Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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