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Trade with Nominal Rigidities: Understanding the Employment and Welfare Effects of the China Shock

Author

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  • Rodríguez-Clare, Andres
  • Ulate, Mauricio
  • Vasquez, Jose P.

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.

Suggested Citation

  • Rodríguez-Clare, Andres & Ulate, Mauricio & Vasquez, Jose P., 2024. "Trade with Nominal Rigidities: Understanding the Employment and Welfare Effects of the China Shock," CEPR Discussion Papers 19222, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19222
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    More about this item

    Keywords

    Downward nominal wage rigidity; China shock; Quantitative trade models;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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