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

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  • Rodríguez-Clare, Andrés
  • Ulate, Mauricio
  • Vasquez, Jose

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, Andrés & Ulate, Mauricio & Vasquez, Jose, 2025. "Trade with nominal rigidities: understanding the unemployment and welfare effects of the China shock," LSE Research Online Documents on Economics 127629, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:127629
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    File URL: https://researchonline.lse.ac.uk/id/eprint/127629/
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    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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