Trade with nominal rigidities: understanding the unemployment and welfare effects of the China shock

Andrés Rodríguez-Clare, Mauricio Ulate and Jose Vasquez

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We present a dynamic quantitative trade and migration model that incorporates downward nominal wage rigidities and show how this framework can generate changes in unemployment and labor participation that match those uncovered by the empirical literature studying the “China shock.” We find that the China shock leads to average welfare increases in most U.S. states, including many that experience unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by around two thirds. In addition, there are 18 states that experience welfare losses in the presence of downward nominal wage rigidity that would have experienced gains without it.

JEL-codes: J01 J1 R14 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2025-11-26
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Published in Journal of Political Economy, 26, November, 2025. ISSN: 0022-3808

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