Trade and Labor Market Dynamics

Author Name Lorenzo CALIENDO (Yale University) / Maximiliano DVORKIN (Federal Reserve Bank of St. Louis) / Fernando PARRO (Federal Reserve Board)
Creation Date/NO. March 2016 16-E-050
Research Project Geospatial Networks and Spillover Effects in Inter-organizational Economic Activities
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We develop a dynamic trade model where production and consumption take place in spatially distinct labor markets with varying exposure to domestic and international trade. The model recognizes 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 without estimating productivities, migration frictions, or trade costs, which are usually difficult to identify. We calibrate the model to 38 countries, 50 U.S. states, and 22 sectors, and use the rise in China's import competition to quantify the effects across more than 1,000 U.S. labor markets. We find that China's trade shock resulted in a loss of 800,000 U.S. manufacturing jobs, about 50% of the change in the manufacturing employment share unexplained by a secular trend. We find aggregate welfare gains, 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.