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Sticky Feet - How Labor Market Frictions Shape the Impact of International Trade on Jobs and Wages (Paperback)
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Sticky Feet - How Labor Market Frictions Shape the Impact of International Trade on Jobs and Wages (Paperback)
Series: Directions in Development - Trade
Expected to ship within 10 - 15 working days
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The analysis in this report confirms the findings of previous
studies that trade liberalization improves aggregate welfare and is
in the long run associated with higher employment and wages. The
analysis addresses a major gap in the literature, which has
heretofore provided limited evidence about the trade-related
adjustment costs faced by workers in developing countries and how
they are affected by mobility costs. Labor market frictions reduce
the potential gains from trade reform. For a tariff reduction in a
given sector, the resulting change in relative prices raises real
wages in some sectors and reduces them in the liberalized sector.
The emerging wage gaps lead to labor reallocation. But workers
typically incur costs to change jobs; the higher the mobility
costs, the slower the transition to the new labor market steady
state. Workers sticky feet result in foregone welfare gains from
trade. This report presents an estimation strategy for capturing
mobility costs when only net flows of workers between industries
are observed, generating cross-country estimates for 47 developed
and developing countries. The basic analytical approach is then
refined to take advantage of micro-level data on worker transitions
and wages when gross flows can be observed to derive mobility cost
estimates that account for sector and formality status. These cost
estimates are used to model the dynamic paths of labor reallocation
between sectors and in and out of the labor force, the associated
wage paths, and the resulting labor adjustment costs. The main
findings of the report are that: labor mobility costs in developing
countries are high; foregone trade gains due to frictions in labor
mobility can also be substantial; workers bear the brunt of
adjustment costs; mobility costs and labor market adjustments to
trade-related shocks vary by industry, firm type, and worker type;
entry costs are significantly higher for formal than for informal
employment; trade reforms increase economy-wide wages and
employment; and workers displaced by plant closings are likely to
face relatively long adjustment periods. The findings provide
insights that could be helpful to policymakers hoping to mitigate
negative short-term consequences of trade liberalization and
facilitate labor adjustment."
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