Costly labor adjustments to trade shocks in CGE analysis

Gains from international trade depend on the ability of factors of production to reallocate across sectors. International trade analyses based on computable general equilibrium (CGE) frameworks typically model the reallocation of aggregate factors of production: e.g., capital, skilled labor, and unskilled labor. These factors are often modeled as perfectly and costlessly mobile across sectors. This paper explores the influence of labor reallocation across sectors subject to explicit adjustment costs as an economy adjusts to several types of trade shocks. The paper compares the results of this analysis to analyses obtained under the assumption of perfectly and costless labor mobility across sectors and with models of imperfect capital mobility across sectors.