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.

Citation

Povoledo, L. (2017). Modelling the sectoral allocation of labour in open economy models. Canadian Journal of Economics / Revue Canadienne d'Économique, 50(3), 685-710. https://doi.org/10.1111/caje.12275

• 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.