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Foreign Demand Shocks to Production Networks: Firm Responses and Worker Impacts

Author

Listed:
  • Emmanuel Dhyne
  • Ayumu Ken Kikkawa
  • Toshiaki Komatsu
  • Magne Mogstad
  • Felix Tintelnot

Abstract

We quantify and explain the firm responses and worker impacts of foreign demand shocks to domestic production networks. To capture that firms can be indirectly exposed to such shocks by buying from or selling to domestic firms that import or export, we use Belgian data with information on both domestic firm-to-firm sales and foreign trade transactions. Our estimates of firm responses suggest that Belgian firms pass on a large share of a foreign demand shock to their domestic suppliers, face upward-sloping labor supply curves, and have sizable fixed overhead costs in labor. Motivated and guided by these findings, we develop and estimate an equilibrium model that allows us to study how idiosyncratic and aggregate changes in foreign demand propagate through a small open economy and affect firms and workers. Our results suggest that the way the labor market is typically modeled in existing research on foreign demand shocks—with no fixed costs and perfectly elastic labor supply—would grossly understate the decline in real wages due to an increase in foreign tariffs.

Suggested Citation

  • Emmanuel Dhyne & Ayumu Ken Kikkawa & Toshiaki Komatsu & Magne Mogstad & Felix Tintelnot, 2022. "Foreign Demand Shocks to Production Networks: Firm Responses and Worker Impacts," NBER Working Papers 30447, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:30447
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    Cited by:

    1. Gene M. Grossman & Elhanan Helpman & Alejandro Sabal, 2023. "Resilience in Vertical Supply Chains," Working Papers 2023-03, Princeton University. Economics Department..
    2. Góes, Carlos & Lopez-Acevedo, Gladys & Robertson, Raymond, 2023. "Gender-Segmented Labor Markets and Trade Shocks," IZA Discussion Papers 15892, Institute of Labor Economics (IZA).
    3. Dhyne, Emmanuel & Kikkawa, Ayumu Ken & Kong, Xianglong & Mogstad, Magne & Tintelnot, Felix, 2023. "Endogenous production networks with fixed costs," Journal of International Economics, Elsevier, vol. 145(C).
    4. Nefs, Merten & van Haaren, Jeroen & van Oort, Frank, 2023. "The limited regional employment benefits of XXL-logistics centres in the Netherlands," Journal of Transport Geography, Elsevier, vol. 109(C).
    5. Pellet, Thomas & Tahbaz-Salehi, Alireza, 2023. "Rigid production networks," Journal of Monetary Economics, Elsevier, vol. 137(C), pages 86-102.
    6. Bijnens, Gert & Anyfantaki, Sofia & Colciago, Andrea & De Mulder, Jan & Falck, Elisabeth & Labhard, Vincent & Lopez-Garcia, Paloma & Meriküll, Jaanika & Parker, Miles & Röhe, Oke & Schroth, Joachim & , 2024. "The impact of climate change and policies on productivity," Occasional Paper Series 340, European Central Bank.
    7. Carlos G'oes & Gladys Lopez-Acevedo & Raymond Robertson, 2023. "Gender-Segmented Labor Markets and Foreign Demand Shocks," Papers 2301.09252, arXiv.org, revised Dec 2023.

    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • F1 - International Economics - - Trade
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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