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GTAP Resource #5728

"Giving GTAP short-run to long-run dynamics: industry-specific capital and sticky-wage rates"
by Dixon, Peter, Maureen Rimmer and Nhi Tran

In standard GTAP capital in each country is completely mobile between industries. Labor markets are characterized by either fixed real wages with completely elastic employment or completely flexible real wages that adjust to eliminate policy-induced movements in aggregate employment. These capital and labor assumptions limit the usefulness of standard GTAP as a tool for analyzing the path of impacts of policy changes from short-run to long-run. This paper describes modifications to standard GTAP to enhance its depiction of both capital and labor markets.
With regard to capital, we introduce industry specificity mainly by a closure swap with little disruption to the standard model: the key idea is to endogenize a phantom tax on the use of capital by each industry in each region while exogenizing or pre-determining start-of-year capital availability in each industry and each region. A simplifying assumption that we retained from standard GTAP is that the commodity composition of investment is the same across industries in any given region.
With regard to labor, we introduce an approach that has been used by the Centre of Policy Studies (CoPS) for the last 20 years in single-country models to trace out the deviations from basecase paths for employment by occupation generated by policy and other shocks. In the simplest version of these models, we assume in policy simulations that the deviation in the real wage rate for an occupation from its basecase forecast path increases at a rate which is proportional to the deviation in employment from its basecase forecast path. The coefficient of proportionality is chosen so that the employment effects of a shock to the economy are largely eliminated after 5 years. In more elaborate CoPS’ models, the wage specification takes account not only of deviations in demand for labor but also of deviations in supply.

Resource Details (Export Citation) GTAP Keywords
Category: 2019 Conference Paper
Status: Published
By/In: Presented at the 22nd Annual Conference on Global Economic Analysis, Warsaw, Poland
Date: 2019
Created: Dixon, P. (4/9/2019)
Updated: Dixon, P. (4/9/2019)
Visits: 1,696
- Baseline development
- Dynamic modeling

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