Openness, Industrial Evolution and Job Flows

Proposal No: 0617888

Institution: PA St U University Park

NSF Program: ECONOMICS

Principal Investigator: Tybout, James

Title: Openness, Industrial Evolution and Job Flows

ABSTRACT

As the current wave of globalization intensifies, firms are exposed to new competition at home and abroad. These changes in the business environment-and associated

changes in volatility and expectations-induce intra-industry changes in trading patterns,

job flows, and productivity distributions. This research project will develop and estimate models that describe these relationships. It will then use cross-country comparisons and counterfactual experiments to quantify the effects of openness on patterns of job creation, job destruction and productivity distributions both at home and abroad. The research will therefore give us a better understanding of how globalization affects domestic competition, productivity changes, and labor markets, in effect giving us a better explanation of how international trade competition in goods and services affects the domestic labor market.

Methodologically, the project will make several contributions. The research will develop new approaches to estimating industrial evolution models building on the work of Krusell and Smith (1998), which characterize dynamic equilibria in monopolistically competitive industries with heterogeneous firms. Applying these techniques, the research will yield econometric estimates of recent, widely-used trade models with heterogeneous firms. The estimated models will go beyond their theoretical counterparts by adding endogenous exit, market-wide uncertainty, and adjustment costs in factor markets. Some of the models proposed in this project will link product market shocks to labor market outcomes by combining industrial

evolution models with search models, thus linking the effects of product market disturbances on firm-specific demand for labor with employer-employee matching and unemployment spells in one model.

This research project is likely to contribute significantly to economic science. The results of this research project will help policy makers to understand how commercial policy, exchange rate policy, and changes in foreign market conditions affect domestic producers and their employees. In addition to describing intra-industry job flows, the models will characterize worker welfare, consumer welfare, productivity distributions, and capital gains and losses. Hence they will provide a basis for inferences concerning the dynamic costs and benefits of changes in the degree of openness. Finally, the models will also address the question of how other features of the policy regime (.e.g., regulations governing the hiring and firing of workers) affect the relationship between openness, industrial evolution patterns and labor market outcomes. By tackling these important policy issues raised by global competition, this research project will significantly contribute to economic science and have broader impacts.