Intra-industry Trade Development and Adjustment Cost: Testing Smooth Adjustment Hypothesis for the Estonian Labor Market

In this chapter we analyze the trade expansion impact on labor market adjustment cost. The main aim of the investigation was to test the smooth adjustment hypothesis (Intra-industry trade expansion leads to significantly smaller labor adjustment costs). The empirical equation analyses the impact of intra-industry trade development on the Estonian sectoral employment change as an empirical proxy of labor market adjustment cost. For this purpose we used panel data for trade, employment, and set of control variables for 25 production sectors and years 2005–2015. In the analysis we apply a dynamic GMM-SYS model. The results obtained did not support the given hypothesis for Estonia in years under consideration. We also found a negative relation between sectorial change in labor productivity and employment. According to our results increasing competition due to trade expansion was not an essential factor of labor adjustment for Estonia.