ESSAYS ON INTERNATIONAL TRADE, LABOR MARKETS AND HUMAN CAPITAL

This dissertation consists of three chapters.Chapter 2 analyzes the reallocation of labor following a trade liberalization. Theseepisodes typically display three features: slow net absorption of labor by export-orientedsectors, large reallocation costs for displaced workers, and a disproportionate adjustmentburden for older workers. To explain these facts and to study alternative policy responses, Idevelop a two-sector small open economy model with overlapping generations, labor marketsearch and matching, and sector-specific human capital accumulated through learning-by-doing.The model is calibrated to Brazilian data in order to study the dynamics of aneconomy in transition after trade liberalization. The calibrated model shows that humancapital plays a much bigger role than search frictions in generating the observed slow adjustmentto reforms. I then use the model to compare the distributional and efficiency effects of alternative worker-assistance programs in general equilibrium. A targeted employmentsubsidy that rewards mobility not only improves the distribution of income but also enhancesefficiency gains from trade by facilitating faster formation of necessary skills duringthe adjustment period. The market failure corrected by the policy is the disincentives ofexperienced workers to invest in new skills which is in turn caused by the interaction ofrent-sharing and intra-sectoral transferability of human capital to future employers. Thepaper contributes to a better understanding of trade-induced transitional dynamics and thelabor market policies aimed at compensating the losers from trade.Chapter 3, a joint work with Nezih Guner and James Tybout, develops a dynamicgeneral equilibrium trade model to explore the interaction between openness, rm dynamicsand labor markets. The motivation comes from the observation that in many liberalizing countries, job turnover rates have risen, informal sectors have become larger, and wagedistributions have become less equal. The model combines standard search frictions inlabor markets with heterogeneous firms that experience ongoing productivity shocks. Eachperiod, firms decide whether to exit or continue producing. Those firms that remain activechoose their export volumes and adjust their employment levels through vacancy postingsor lay-os. Openness affects labor markets in our model because it increases rents forefficient firms and reduces rents for inefficient firms, as in Melitz (2003). These well-knowneffects interact with idiosyncratic productivity shocks and with scale economies in hiringcosts to induce adjustments in the equilibrium job turnover rate, unemployment rate andwage distribution as trade barriers are dismantled. After fitting this model to Colombianmicro data on establishments and households, we isolate the effects of trade frictions onlabor market outcomes using counter-factual simulations. The results suggest that themechanisms highlighted by our model can be important.Chapter 4 presents a model of development in which skilled labor is an input in technologyadoption. The model combines Nelson and Phelps (1966) type technology dynamicswith a growth model in which intermediate goods are used to produce a final good. Theintermediate good producers hire skilled labor to increase their productivity by adoptingtechniques from an exogenously evolving stock of world knowledge. I solve for the stationaryequilibrium and derive analytic expressions for steady state income level and wagepremium. In a quantitative exercise, I calibrate the model and compare its predictions withdata. The model successfully accounts for cross-country income differences and within countrywage premia on skilled labor. These results strengthen the idea that different typesof human capital perform separate tasks and should not be aggregated into a single stockof human capital in development accounting exercises. The availability of skilled labor ispotentially much more important for development than such aggregative exercises have sofar suggested.