Shock tactics: managing economic structural adjustments

STRUCTURAL ADJUSTMENT, INCOME RISK AND HUMAN CAPITAL SPECIFICITY

What if a major change in technology, trade policy or the exchange rate suddenly made some sectors of the Australian economy less competitive, resulting in the need to redeploy a significant amount of labour and capital across the economy?

How can such a major structural adjustment be managed to make the impact as quick and painless as possible?

A University of Melbourne economist is delving into just these questions, using an Australian Research Council grant to investigate how structural adjustment can be best managed in an economy undergoing significant upheaval.

To do this, Professor Chris Edmond is building a macroeconomic model with two key features - human capital specificity, meaning skills that may not be easily transferable across sectors of the economy, and incomplete markets for income risk, meaning that the burdens of adjustment are concentrated on displaced workers rather than shared across all workers.

While both modelling features have been used before, this project will be one of the first to emphasise the quantitative importance of the interactions between human capital specificity and incomplete markets in the presence of trade adjustment and other large macroeconomic shocks. 

In the future, Professor Edmond will use his model to quantitatively evaluate policies designed for managing structural adjustment.

Impact

This project is expected to provide a better understanding of the size and timing of the reallocation of employment across different sectors of the economy after a large macroeconomic shock.

Prof Edmond also wants to provide a better understanding of the welfare consequences for displaced workers after an economic shock, and the policies best suited to alleviating the burdens of structural adjustment on them, while also allowing the overall economy to make the most of the productivity gains associated with a more efficient cross-sectional allocation of resources.