A macroeconomic study of the costs, consequences and policy implications of sectorial labour reallocation
This thesis uses a macroeconomic approach to study labour adjustments following
sector-specific shocks. I develop a general model, investigate its dynamic adjustment
process and apply it to study the Canadian economy in 2002–2006. This episode is an
interesting case study because it features a significant labour reallocation to the resource
sector and away from manufacturing, precipitated by an increase in global commodity
prices and an associated exchange rate appreciation.
The results establish that impediments to the adjustment process are economically
significant in the aggregate for this episode, imposing costs of up to three percent of output
during the transition. These findings augment several studies that suggest individual
workers can face large and persistent earnings losses during job turnover. However, unlike
previous research, I use the search and matching approach — which incorporates explicit
labour market frictions — to uncover the sources of these costs for the macroeconomy.
The findings emphasize that job loss itself is not particularly important quantitatively,
but rather the non-transferability of skills during job turnover is a key concern.
Finally, I investigate how labour market policy impacts the economy’s response to
sector-specific shocks by analyzing a counterfactual policy change in unemployment benefits
and improved skill acquisition through faster learning and training subsidies. The
results reveal interesting policy trade-offs. First, I find that increasing unemployment
benefits prolongs the economy’s adjustment, reduces employment, output and welfare
and increases unemployment incidence and duration. However, because this policy impacts
high-productivity and low-productivity sectors differently, it shifts the composition
of the remaining jobs towards high-productivity sectors, thereby raising aggregate productivity
and also reduces wage inequality. Second, I find that faster skill acquisition
has the potential to deliver large economic gains in the long-run, but requires up-front
investment costs which entail reduced economic performance in the short-run.
Advisor:Queen's University (Kingston, Ont.). Theses (Queen's University (Kingston, Ont.)); Allen Head and Thorsten Koeppl; Economics
Source Type:Master's Thesis
Keywords:sectoral labour reallocation search and matching adjustment costs skills training unemployment
Date of Publication:08/05/2008