IMFsfaffpapers Robert Flood Editor and Committee Chair Ratna Sahay Co-Editor Marina Primorac Assistant Editor Rebecca Coke Research Assistant La Quita Pinkston Administrative Coordinator Editorial Committee F. Charles Adams Liam Ebrill William E. Alexander Atish R. Ghosh Brian Aitken Nadeem Haque Tamim Bayoumi Donald J. Mathieson Sharmini Coorey Eswar S. Prasad Among the responsibilities of the International Monetary Fund, as set forth in its Articles of Agreement, is the obligation to "act as a centre for the collection and exchange of informa- tion on monetary and financial problems." IMF Staff Papers makes available to a wider audi- ence papers prepared by IMF staff members. The views presented in the papers are those of the authors and do not necessarily reflect the position of the Executive Board or of the IMF To facilitate electronic storage and retrieval of bibliographic data, IMF Staff Papers has adopted the subject classification scheme developed by the Journal of Economic Literature. Subscription: $US54.00 a volume or the approximate equivalent in the currencies of most countries. Four issues constitute a volume. Single copies may be purchased at $18. The individual academic rate to full-time professors and students of universities and colleges is $27 a volume. Subscriptions and orders should be sent to: International Monetary Fund Publication Services 700 19th Street, N.W. Washington, D.C. 20431, U.S.A. Telephone: (202) 623-7430 Fax: (202) 623-7201 E-mail: [email protected] Internet: http://www.imf.org ©International Monetary Fund. Not for Redistribution International Monetary Fund Volume 46 Number 1 IMFstaffpapers March 1999 ©International Monetary Fund. Not for Redistribution EDITOR'S NOTE The Editor invites from contributors outside the IMF brief comments (not more than 1,000 words) on published articles in IMF Staff Papers. These comments should be addressed to the Editor, who will forward them to the author of the original article for reply. Both the comments and the reply will be considered for publication. The data underlying articles published in IMF Staff Papers are available on the journal©s website (http://www.imf.org/staffpapers). Readers are invited to use these data to expand on the material in the articles, and the journal will consider publishing such work. © 1999 by the International Monetary Fund International Standard Serial Number: ISSN 1020-7635 The U.S. Library of Congress has cataloged this serial publication as follows: International Monetary Fund Staff papers Ð International Monetary Fund. v. 1- Feb. 1950- [Washington] International Monetary Fund. v. tables, diagrs. 23 cm. Three no. a year, 1950-1977; four no. a year. 1978- Indexes: Vols. 1-27, 1950-80, 1 v. ISSN 1020-7635 = Staff papers Ð International Monetary Fund. 1. Foreign exchangeÐPeriodicals. 2. CommerceÐPeriodicals. 3. Currency questionÐPeriodicals. HG3810.15 332.082 53-35483 ©International Monetary Fund. Not for Redistribution Letter from the Editor Dear Readers, I am the new Editor of the International Monetary Fund©s academic journal, IMF Staff Papers. I have worked in the Research Department at the IMF for over 11 years and have served at the co-editor level for the Journal of International Economics and the American Economic Review. Along with my editorship, the journal has instituted several changes. First, the name of Staff Papers has changed to IMF Staff Papers, and the journal has a new look. Second, the refereeing process has been changed to the extent that papers sub- mitted to IMF Staff Papers are now subject to expert review outside the IMF. Third, all papers and underlying data published by IMF Staff Papers are now available freely at our web site (http://www.imf.org/staffpapers). And finally, from time to time the journal will publish issues devoted fully or partly to special topics sug- gested by staff, subscribers, and other readers. It is my intention to continue the journal©s long tradition of publishing papers by IMF staff and invited guests on a variety of topics of interest to the IMF, our mem- ber countries, and our general readers. In addition, the journal will continue to pub- lish outside comments, criticisms, and interesting replications relating to our published work. Sincerely, Robert P. Flood Editor, IMF Staff Papers iii ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution International Monetary Fund Volume 46 Number 1 Contents March 1999 How Do the Skilled and the Unskilled Respond to Regional Shocks? The Case of Spain Paolo Mauro and Antonio Spilimbergo • 1 Growth, Trade, and Deindustrialization Robert Rowthorn and Ramana Ramaswamy • 18 Regional Trade Agreements or Broad Liberalization: Which Path Leads to Faster Growth? Athanasios Vamvakidis • 42 Exchange and Capital Controls as Barriers to Trade Natalia T. Tamirisa • 69 Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions Tamim Bayoumi and Ronald MacDonald • 89 ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution IMF Staff Papers Vol. 46, No. 1 (March 1999) © 1999 International Monetary Fund How Do the Skilled and the Unskilled Respond to Regional Shocks? The Case of Spain PAOLO MAURO and ANTONIO SPILIMBERGO* Are there any differences in how workers of different skill levels respond to regional shocks? This paper addresses that question using the methodology of Blanchard and Katz (1992) and a unique data set on working-age population, labor force, and employ- ment for five educational groups (ranging from the illiterate to the college-educated) over 1964—92 for the 50 Spanish provinces. The paper finds that the highly skilled migrate very promptly in response to a decline in regional labor demand, while low- skilled workers drop out of the labor force or stay unemployed. [JEL E24, J61] When workers in a given region lose their jobs, do they remain unemployed, drop out of the labor force, or migrate? In other words, what are the mechanisms of adjustment to local labor demand shocks? Existing studies, beginning with the seminal paper by Blanchard and Katz (1992) on the 50 U.S. states, and including those by Decressin and Fatas (1995) on the regions of Europe and by Obstfeld and Peri (1998) on the regions of a wide range of industrial countries, have addressed that question with respect to the labor force as a whole. However, owing in part to data limitations, none of *Paolo Mauro is an Economist in the IMF©s European I Department and Antonio Spilimbergo is an Economist in the Research Department. Paolo Mauro received his Ph.D. from Harvard University. Antonio Spilimbergo received his Ph.D. from M.I.T. The authors gratefully acknowledge helpful com- ments and suggestions by Jacques Artus, Maria Carkovic, Jorg Decressin, Enrica Detragiache, Robert Flood, Martin Hardy, Alexander Hoffmaister, Michael Mussa, Danny Quah, Peter Wickham, Charles Wyplosz, and seminar participants at the International Monetary Fund and the European Economic Association meetings, as well as high-quality research assistance by Madhuri Edwards, and indebted to Instituto Valenciano de Investigaciones Economicas for providing data. 1 ©International Monetary Fund. Not for Redistribution Paolo Mauro and Antonio Spilimbergo those studies has examined whether the relative speed and strength of these adjustment mechanisms depend on workers© educational levels. To fill that gap, this paper analyzes the dynamic responses to regional labor demand shocks in Spain, considering separately various educational groups. There are good reasons to expect that workers with different educational levels will respond in different ways to regional labor demand shocks. In fact, the opportu- nity cost of not working is typically higher for the highly skilled.1 Therefore, in response to a job loss motivated by a collapse in local labor demand, the highly skilled are more likely than low-skilled workers to migrate rather than remaining unem- ployed or dropping out of the labor force. It is also important to recognize that the adjustment mechanisms to labor demand shocks by workers of different educational levels depend on existing labor market institutions and policies. This can be seen by considering two extreme hypothetical cases: in the presence of very generous unem- ployment compensation, migration might be an unattractive option for low-skilled workers, though perhaps still not for the highly skilled; by contrast, in the presence of low unemployment compensation, both low-skilled and highly skilled workers might have similarly strong incentives to migrate. This paper focuses on the case of Spain. It uses a data set on employment, labor force, and working-age population by educational level for the 50 provinces of Spain over 1964-92. That data set, published by the Instituto Valenciano de Investigaciones Economicas, is almost unique in that similar data are not easily available for any other countries. Beyond the advantage of data availability, how- ever, the case of Spain is extremely interesting in itself. Not only does Spain have the highest unemployment rate (19 percent in mid-1998) among industrial coun- tries, but it also displays large and persistent unemployment rate differences among its regions. By analyzing how workers with different educational levels respond to regional labor demand shocks, this paper considers those issues from a new angle. It also forms part of