A proximity-based approach to labor mobility in CGE models with an application to sub-saharan Africa

Abstract

The ease with which workers can move between sectors has a strong impact on how shocks affect an economy. This paper introduces an approach to labor mobility with frictions. Under the approach, worker capabilities (their efficiencies in different sectors) depend on their sector affiliation. If workers belonging to sector a move to a’, their efficiency shortfall compared to workers assigned to a’ is measured by a proximity parameter, 0 ≤ proxa,a’ ≤ 1. If proxa,a’ < 1, the efficient quantity reaching a’ is below the physical quantity. In this setting, profit-maximizing producers, facing given physical worker wages (which may vary depending on sectoral affiliation), pay the same wage per efficiency unit irrespective of origin and thus pay less efficient workers a lower wage per physical unit. This approach to labor mobility is tested in a static CGE model that is applied to an illustrative sub-Saharan African dataset with sector proximities defined using the approach of the product-space literature. Simulations of positive export price shocks show that, the higher the proximities, the stronger the labor reallocation and the welfare gains.