Intra-industry trade and labor costs: The smooth adjustment hypothesis

• Author(s): Faustino, Horácio C. ; Leitão, Nuno Carlos
• Date: 2009
• Persistent ID: http://hdl.handle.net/10400.5/2549
• Origin: Repositório da UTL
• Subject(s): Adjustment costs; labor market; marginal intra-industry trade
• Document Type: Other
• Language: English

Description

According to the smooth adjustment hypothesis (SAH), the labor-market adjustment costs in the form of unemployed resources will be lower if trade expansion is intra-industry rather than inter-industry in nature. This is what we attempt to test empirically using the Brulhart (1994) marginal intra-industry trade (MIIT) index and a dynamic panel data analysis. Considering the contemporaneous effect the results do not support the SAH. However, if we consider the one- year and-two years lags effects, the conclusion is different and it is sensitive to the size of the lag. Comparing with other empirical studies our results suggest that the validity of SAH depends on the variable choose as adjustment labor cost index, the time lag structure and the set of control variables.