Labor Market Flexibility, International Competitiveness and Patterns of Trade

The paper focuses on the question of how labor market regulations can affect a country’s competitive position in international trade and international trade patterns. The analysis shows that differences in labor market flexibility between countries affect their competitive positions in international markets and can serve as independent cause of international trade. it is argued that an increase in labor market flexibility may change the relative price of goods within the country making it more competitive in international markets for the commodities with uncertain demand. changes in relative prices can alter countries’ comparative advantage and thus international trade patterns. furthermore, it is shown that due to the differences in relative prices resulting from different labor market regulations, international trade between countries can be observed even if the countries are identical in all respects (e.g., labor productivity and production technology). data reveal that a country with more a flexible labor market has a comparative advantage in, and tends to export, goods with more variable demand (e.g., fashionable cloths, seasonal toys), while a country with a more rigid labor market has a comparative advantage in, and tends to export, commodities with more stable demand.