Marginal Intra‐Industry Trade and Adjustment Costs: The Australian Experience*

Abstract

The objective of this research is to investigate labour market adjustment in Australian manufacturing industry over the period 1992–2000, a time of significant adjustment in the country’s trade pattern. Specifically, the focus is on the so‐called smooth adjustment hypothesis, which posits that, compared with inter‐industry trade, intra‐industry trade (IIT) expansion is associated with relatively lower factor adjustment costs. A dynamic panel data approach (GMM‐System) is employed. We find that there is a negative correlation between changes in employment and increased IIT. This result provides support for the smooth adjustment hypothesis. Given the rise in IIT as a proportion of Australia’s overall trade during the period under review, the resulting trade‐related adjustment in labour markets is likely to have been less than otherwise expected.