Labor Market Rigidity and the Factor Content of Disaggregated Trade Patterns

Abstract

This article examines the power of labor market rigidities (LMR) to influence export flows of 113 countries from 1995 to 2013 for up to 5018 different goods. Since LMR can alter the productive use of factors in the production process, I expect that the interplay of a country's LMR and the good-specific factor intensities determine comparative advantage. Based on a multi-sector Ricardian trade model, I estimate a gravity like equation to show that countries with a rigid labor market tend to export more of capital-intensive production and less of goods that have a high global sales volatility. The impact of LMR on natural resource-intensive and human capital-intensive goods depends on countries' stage of development and the aggregation level of trade date, among others. My estimates consider a wide array of high-dimensional control variables such as exporter- and importer-good fixed effects, Heckscher-Ohlin forces, and bilateral gravity forces.