Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock

Lorenzo Caliendo, Maximiliano Dvorkin and Fernando Parro

No 2015-9, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We develop a dynamic trade model with spatially distinct labor markets facing varying exposure to international trade. The model captures the role of labor mobility frictions, goods mobility frictions, geographic factors, and input-output linkages in determining equilibrium allocations. We show how to solve the equilibrium of the model and take the model to the data without assuming that the economy is at a steady state and without estimating productivities, migration frictions, or trade costs, which can be difficult to identify. We calibrate the model to 22 sectors, 38 countries, and 50 U.S. states. We study how the rise in China's trade for the period 2000 to 2007 impacted U.S. households across more than a thousand U.S. labor markets distinguished by sector and state. We find that the China trade shock resulted in a loss of 0.8 million U.S. manufacturing jobs, about 25% of the observed decline in manufacturing employment from 2000 to 2007. The U.S. gains in the aggregate but, due to trade and migration frictions, the welfare and employment effects vary across U.S. labor markets. Estimated transition costs to the new long-run equilibrium are also heterogeneous and reflect the importance of accounting for labor dynamics.

Keywords: Labor market dynamics; international trade; migration; internal trade; economic geography; mobility frictions; trade costs; input-output linkages; China’s trade; welfare effects; general equilibrium; manufacturing employment (search for similar items in EconPapers)
JEL-codes: E24 F16 J62 R13 R23 (search for similar items in EconPapers)
Pages: 94 pages
Date: 2015-05-01
New Economics Papers: this item is included in nep-dge, nep-geo, nep-int, nep-lab and nep-mac
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Citations: View citations in EconPapers (49)

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Journal Article: Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock (2019)
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DOI: 10.20955/wp.2015.009

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