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Delay and dynamics in labor market adjustment: simulation results

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Chaudhuri, Shubham
McLaren, John

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Abstract

We simulate numerically a trade model with labor mobility costs added, modeled in such a way as to generate gross flows in excess of net flows. Adjustment to a trade shock can be slow with plausible parameter values. In our base case, the economy moves 95% of the distance to the new steady state in approximately eight years. Gross flows have a large effect on this rate of adjustment and on the normative effects of trade. Announcing and delaying the liberalization can build – or destroy – a constituency for free trade. We study the conditions under which these contrasting outcomes occur.

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Elsevier

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Economics

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Journal of International Economics

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10.1016/j.jinteco.2007.11.003

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