Modelling the sectoral allocation of labour in open economy models

Povoledo, Laura

Abstract

© 2017 Canadian Economics Association Indivisible labour is not the only type of non-convexity affecting labour supply decisions. Another type of non-convexity arises in economies with sectors whenever individuals can work in only one sector at a time. I introduce this restriction into an open economy model with a tradeable and a non-tradeable sector, and I use lotteries to convexify the consumption possibilities set. This approach implies that the aggregate elasticity of labour supply becomes infinite. I compare the performance of the model with an analogous model in which the labour supply elasticity is finite. I find that there is a disconnect between the response of wages to monetary shocks and the open economy variables. The labour supply elasticity plays a more important role in the transmission of technology and government expenditure shocks to the real exchange rate and the terms of trade.

• Journal Article Type: Article
• Acceptance Date: Apr 2, 2017
• Online Publication Date: Jun 28, 2017
• Publication Date: Aug 1, 2017
• Deposit Date: Dec 14, 2016
• Publicly Available Date: Dec 14, 2016
• Journal: Canadian Journal of Economics
• Print ISSN: 0008-4085
• Electronic ISSN: 1540-5982
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 50
• Issue: 3
• Pages: 685-710
• DOI: https://doi.org/10.1111/caje.12275
• Keywords: tradeable and nontradeable sector, international business cycles, labour supply elasticity
• Public URL: https://uwe-repository.worktribe.com/output/882476
• Publisher URL: http://dx.doi.org/10.1111/caje.12275
• Additional Information: Additional Information : This is the peer reviewed version of the following article: Povoledo, L. (2017) Modelling the sectoral allocation of labour in open economy models. Canadian Journal of Economics, 50 (3). pp. 685-710. ISSN 0008-4085 Available from: http://eprints.uwe.ac.uk/31504, which has been published in final form at http://dx.doi.org/10.1111/caje.12275. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions.
• Contract Date: Dec 14, 2016