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Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence

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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.

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  • Rodrigo Adão & Costas Arkolakis & Federico Espósito, 2019. "Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence," Cowles Foundation Discussion Papers 2163, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:2163
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    Cited by:

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    4. Rodrigo Ad~ao & Michal Koles'ar & Eduardo Morales, 2018. "Shift-Share Designs: Theory and Inference," Papers 1806.07928, arXiv.org, revised Aug 2019.
    5. Rappoport, Veronica & Federico, Stefano & Hassan, Fadi, 2019. "Trade shocks and credit reallocation," LSE Research Online Documents on Economics 103422, London School of Economics and Political Science, LSE Library.
    6. Martina Magli, 2020. "The Direct and Indirect Effect of Services Offshoring on Local Labour Market Outcomes," CESifo Working Paper Series 8413, CESifo.
    7. Redding, Stephen J., 2020. "Trade and Geography," CEPR Discussion Papers 15268, C.E.P.R. Discussion Papers.
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    18. Adão, Rodrigo & Kolesár, Michal & Morales, Eduardo, 2018. "Shift-Share Designs: Theory and Inference," CEPR Discussion Papers 13118, C.E.P.R. Discussion Papers.
    19. Becker, Raphael Niklas & Henkel, Marcel, 2020. "The role of key regions in spatial development," DICE Discussion Papers 331, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    20. Hornbeck, Richard & Moretti, Enrico, 2019. "Estimating Who Benefits from Productivity Growth: Direct and Indirect Effects of City Manufacturing TFP Growth on Wages, Rents, and Inequality," IZA Discussion Papers 12277, Institute of Labor Economics (IZA).
    21. Esposito, Federico, 2020. "Demand Risk and Diversification through International Trade," MPRA Paper 100865, University Library of Munich, Germany.
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    Keywords

    Economic Impacts of Globalization; Regional Economics Measurement; International Trade; Economic Geography; General Equilibrium; Structural Estimation;

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