Read the working paper
INSEAD Working Paper 2013/62/EPS
This paper develops a dynamic Heckscher Ohlin Samuelson model with sectorspecific human capital and overlapping generations to characterize the dynamics and welfare implications of gradual labor market adjustment to trade. Our model is tractable enough to yield sharp analytic results, that complement and clarify an emerging empirical literature on labor market adjustment to trade. Existing generations that have accumulated specific human capital in one sector can switch sectors when the economy is hit by a trade shock. Nonetheless, the shock induces few workers to switch, generating a protracted adjustment that operates largely through the entry of new generations. This results in wages being tied to the sector of employment in the short-run but to the skill type in the long-run. Relative to a world with general human capital, welfare is improved for the skill group whose typeintensive sector shrinks, and policies intended to aid trade adjustment for affected workers can be counterproductive.