TY - JOUR

T1 - Imperfect Mobility of Labor across Sectors

T2 - A Reappraisal of the Balassa-Samuelson Effect

AU - Cardi, Olivier

AU - Restout, Romain

PY - 2015/11

Y1 - 2015/11

N2 - This paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two-sector open economy model with imperfect substitutability in hours worked across sectors. The Balassa–Samuelson (1964) model predicts that a rise in the sectoral productivity ratio by 1% raises the relative price of non tradables by 1% while leaving the non traded wage-traded wage ratio unchanged. Applying cointegration methods to a panel of fourteen OECD countries over the period 1970–2007, our estimates show that the relative price rises by only 0.78% and the relative wage falls by 0.27%. While our first set of empirical findings cast doubt on the quantitative predictions of the Balassa–Samuelson model, our second set of evidence highlights the role of imperfect labor mobility: the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted in countries with higher intersectoral reallocation of labor. We show that the ability of the two-sector model to account for our evidence quantitatively relies upon two ingredients: i) imperfect mobility of labor across sectors, and ii) physical capital accumulation. Finally, our numerical results reveal that the model predicts the relative price response fairly well, and to a lesser extent the relative wage response.

AB - This paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two-sector open economy model with imperfect substitutability in hours worked across sectors. The Balassa–Samuelson (1964) model predicts that a rise in the sectoral productivity ratio by 1% raises the relative price of non tradables by 1% while leaving the non traded wage-traded wage ratio unchanged. Applying cointegration methods to a panel of fourteen OECD countries over the period 1970–2007, our estimates show that the relative price rises by only 0.78% and the relative wage falls by 0.27%. While our first set of empirical findings cast doubt on the quantitative predictions of the Balassa–Samuelson model, our second set of evidence highlights the role of imperfect labor mobility: the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted in countries with higher intersectoral reallocation of labor. We show that the ability of the two-sector model to account for our evidence quantitatively relies upon two ingredients: i) imperfect mobility of labor across sectors, and ii) physical capital accumulation. Finally, our numerical results reveal that the model predicts the relative price response fairly well, and to a lesser extent the relative wage response.

KW - Relative price of non tradables

KW - Sectoral wages

KW - Productivity growth

KW - Sectoral labor reallocation

KW - Investment

U2 - 10.1016/j.jinteco.2015.06.003

DO - 10.1016/j.jinteco.2015.06.003

M3 - Journal article

VL - 97

SP - 249

EP - 265

JO - Journal of International Economics

JF - Journal of International Economics

SN - 0022-1996

IS - 2

ER -