Working Paper BETA #2016-05

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Title : Technical change biased toward the traded sector and labor market frictions.

Author(s) : Luisito Bertinelli, Olivier Cardi, Romain Restout

Abstract : This paper develops a tractable version of a two-sector open economy model with search frictions in order to account for the relative wage and the relative price effects of higher productivity growth in tradables relative to non tradables. Using a panel of eighteen OECD countries over the period 1970-2007, our estimates reveal that a 1 percentage point increase in the productivity differential between tradables and non tradables lowers the non traded wage relative to the traded wage (relative wage) by 0.22% and appreciates the relative price of non tradables by 0.64%. While the decline in the relative wage reveals the presence of mobility costs preventing wage equalization across sectors, the relative wage responses to a productivity differential display a large dispersion across countries, thus suggesting that labor market frictions vary substantially across OECD economies. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that the relative wage significantly declines more in countries where labor market regulation is more pronounced. These empirical findings can be rationalized in a two-sector open economy model with search in the labor market as long as we allow for an endogenous sectoral labor force participation decision. In line with our estimates, our quantitative analysis reveals that the relative wage falls more in countries where unemployment benefits are more generous, firing cost is high, the worker bargaining power is large. When calibrating the model to each OECD economy, our numerical results reveal that the model predicts the relative wage response fairly well, and to a lesser extent the relative price response.

Key-words : Productivity growth; Sectoral wages; Relative price of non tradables; Search theory; Labor market institutions.

JEL Classification : E24; F16; F41; F43; J65.