The Effect of Imports on Employment Under Rational Expectations.
PUBLIC RESEARCH INST ALEXANDRIA VA
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A number of studies have concluded that the demand for labor depends on both current and expected future output. Though many of these studies rely on the assumption of rational expectations, none has recognized and made use of a unique characteristic of the theory of rational expectations that in the process of generating measures of expectations information is automatically created on the extent to which different variables affect expectations. Hence, the differing response to alternative causes of output change can be estimated. In this paper, we focus on imports as a distinct cause of output change. We test the hypothesis that employment reacts more rapidly to output changes when they are due to changes in imports than when they are due to the business cycle or other influences. It has been standard practice to use input-output studies to predict the effect of imports on the domestic demand in specific industries. The input-output model assumes that a change in output will cause proportional and immediate effects on industry employment, no matter what caused the change in output.
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