Introducing Roy-like worker assignment into computable general equilibrium models

ABSTRACT

This article develops a new computable general equilibrium model incorporating a Roy-like worker assignment in which heterogeneous workers endogenously sort into different technologies based on their comparative advantage. The model predicts significantly higher welfare-improving effects of trade liberalization due to the technology-upgrading mechanism.

KEYWORDS:

• Technology upgrading
• heterogeneous firms/workers
• Roy model
• computable general equilibrium (CGE)
• gains from trade

JEL CLASSIFICATION:

• C68
• D58
• F16

Acknowledgements

I am grateful to Jean Mercenier who introduced me to the world of applied general equilibrium modeling. Ialso thank participants at the 24th International Input-Output Conference (IIOA 2016) for helpful discussions on an earlier version of the paper.

Disclosure statement

No potential conflict of interest was reported by the author.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ See, e.g. Arkolakis et al. (2008), Feenstra (2010) and Balistreri and Rutherford (2013) for discussions and analyses of gains from trade in models with firm heterogeneity à la Melitz.

² Note that $x_L=x_L^d$ and $x_H=x_H^d+x_H^{d\ast }$, with $\left(1+{\tau }^{imp}\right)p_H^{\ast }$ for the price of imported goods and $p_H^{\ast }=p_H$ from the symmetry.

³ Any more general functional forms consistent with Equation (2)(2) $0<\frac{\mathrm{\partial }{\phi }_L(z)}{\mathrm{\partial }z}\frac{1}{{\phi }_L(z)}<\frac{\mathrm{\partial }{\phi }_H(z)}{\mathrm{\partial }z}\frac{1}{{\phi }_H(z)},$(2) can, of course, be adopted.

⁴ See Jung and Mercenier (2014) for more detailed discussions and analyses in this framework including income effects.

⁵ Armington elasticity of 3 is used, while a value of 5 is used for the elasticity of substitution between individual varieties in Krugman, Melitz and Jung models, and fixed costs are calibrated to ensure the zero-profit conditions. $a_H/a_L=1.2$ is used for the technology gap in Jung model. Finally, for comparability, a uniform distribution is assumed both in Melitz and Jung models.

⁶ Used indexes are: country $i$, $j$; sector $s$, $t$; factor $f$ (other than labour); technology (and/or firm-type) $n\in \left\{L,H\right\}$.

⁷ Here, we assume a uniform skill distribution. It is, however, straightforward to incorporate various more general skill distributions. See Jung (2018) introducing log-normal skill distribution and analyzing technology-augmented skill distribution in a North–South offshoring context.

⁸ Three aggregate sectors are considered: primary (S1), manufacturing (S2) and Service (S3), where perfect competition is assumed for S1 and S3. For $a_H/a_L$ in the manufacturing sector, 1.142 and 1.144 are used for Korea and the US, respectively (Aw, Chung, and Roberts 2000; Bernard and Jensen 1999). For the elasticity of substitution between individual varieties, 12.6 is used from Broda and Weinstein (2006).