Marginal intra-industry trade and adjustment costs: the Australian experience

The objective of this research is to investigate labour market adjustment in Australian manufacturing industry over the period 1992–2000, a time of significant adjustment in the country’s trade pattern. Specifically, the focus is on the so-called smooth adjustment hypothesis, which posits that, compared with inter-industry trade, intra-industry trade (IIT) expansion is associated with relatively lower factor adjustment costs. A dynamic panel data approach (GMM-System) is employed. We find that there is a negative correlation between changes in employment and increased IIT. This result provides support for the smooth adjustment hypothesis. Given the rise in IIT as a proportion of Australia’s overall trade during the period under review, the resulting trade-related adjustment in labour markets is likely to have been less than otherwise expected.