On February 21, 2014, ISET hosted Dr. Gerald Willmann of the University of Bielefeld. Dr. Willmann presented his paper, which he coauthored with Emily Blanchard, titled: “Unequal Gains, Prolonged Pain: Dynamic Adjustment Costs and Protectionist Overshooting”.
At the beginning of the presentation, Dr. Willmann explained his model from the field of political economy. The model, which concerns the political economy of trade protection, has two main features. First, there exists labor market friction that prevents people from shifting their human capital between sectors in accordance with changes in labor market conditions. Second, political decision-making is modeled as an endogenous process where decisions are made by a median voter.
In this paper the authors discuss developed countries, which have a comparative advantage in skilled labor intensive sectors. According to one of the (quite realistic) assumptions of the model, policy can react relatively quickly compared to skills adjustment. When the terms of trade improve, skilled labor wants less protection and unskilled labor needs more. So, if the composition of the population is such that the median voter is unskilled, the political process will lead to tougher protectionist measures, i.e. higher tariffs. The latter, in turn, causes a long time before economic and political adjustments happen, i.e. people shift their human capital to more profitable options and the median voter will require less and less protection.
The main conclusion of the paper is that the more unequal gains a macroeconomic shock (in this case, the improvement in terms of trade) brings, the more protectionist measures are taken and the longer the costly adjustment process takes. As a result, unequal gains are reflected in prolonged pains.
During the course of the presentation the validity of the assumptions and their policy relevance was carefully examined by the audience. ISET would like to thank Dr. Gerald Willmann for the food for thought he provided to the whole ISET community with his thought-provoking presentation.
