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Modelling the sectoral allocation of labour in open economy models

Author

Listed:
  • Laura Povoledo

    (University of the West of England, Bristol)

Abstract
Indivisible labour is not the only type of nonconvexity affecting labour supply decisions. Another type of nonconvexity 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 nontradeable 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 the infinite labour supply elasticity helps explain the persistence of net exports. However, all the other consequences of the labour supply elasticity for the model-implied second-order moments depend on whether the pricing assumption is Producer Currency Pricing (PCP) or Local Currency Pricing (LCP).

Suggested Citation

  • Laura Povoledo, 2013. "Modelling the sectoral allocation of labour in open economy models," Working Papers 20131312, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    • Handle: RePEc:uwe:wpaper:20131312
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    More about this item

    Keywords

    Tradeable and nontradeable sectors; International business cycles; Labour supply elasticity;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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