Authors: Oliver Cardi (Université Panthéon-Assas ERMES, Ecole Polytechnique), Romain Restout (Université catholique de Louvain IRES)
This paper investigates the relative price and relative wage e®ects of a higher productivity in the traded sector compared with the non-traded sector in a two-sector open economy model with imperfect substitutability in hours worked across sectors. The Balassa-Samuelson model predicts that a rise in the sectoral productivity ratio by
1% raises the relative price of non tradables by 1% while leaving unchanged the non-traded wage-traded wage ratio. Our panel cointegration and unit root tests applied to a panel of fourteen OECD countries over the period 1970-2007 show that the relative price rises by only 0.68% while the relative wage falls by 0.24%. Hence, our first set of empirical findings cast doubt about the conclusions of the Balassa-Samuelson model.A second set of findings highlights the role of imperfect labor mobility: interacting the ratio of sectoral productivity with an index of labor mobility across sectors, we find
that the relative price responds more to the productivity differential while the reaction of the relative wage is more muted when labor mobility is higher. We show that the ability of the two-sector model to account for our evidence quantitatively relies upon two ingredients: i) imperfect labor mobility, ii) capital accumulation. Finally, our numerical results are robust to the introduction of i) non-separability in preferences between consumption and labor, and ii) traded investment.