Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence
Costas Arkolakis () and
Federico Esposito ()
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Rodrigo Adão: The University of Chicago Booth School of Business
No 2163, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University
How do shocks to economic fundamentals in the world economy affect local labor markets? In a framework with a flexible structure of spatial linkages, we characterize the model-consistent shock exposure of a local market as the exogenous shift in its production revenues and consumption costs. In general equilibrium, labor outcomes in any market respond directly to the market’s own shock exposure, and indirectly to other markets shocks exposures. We show how spatial linkages control the size and the heterogeneity of these indirect effects. We then develop a new estimation methodology - the Model-implied Optimal IV (MOIV) - that exploits quasi-experimental variation in economic shocks to estimate spatial linkages and evaluate their counterfactual implications. Applying our methodology to US Commuting Zones, we find that difference-in-difference designs based on model-consistent measures of local shock exposure approximate well the differential effect of international trade shocks across CZs, but miss around half of the aggregate effect, partly due to the offsetting action of indirect effects.
Keywords: Economic Impacts of Globalization; Regional Economics Measurement; International Trade; Economic Geography; General Equilibrium; Structural Estimation (search for similar items in EconPapers)
Pages: 108 pages
New Economics Papers: this item is included in nep-geo, nep-int and nep-ure
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