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International competition and labor market adjustment

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Abstract

How does welfare change in the short- and long-run in high wage countries when integrating with low wage economies like China? Even if consumers benefit from lower prices, there can be significant welfare losses from increases in unemployment and lower wages. I construct a dynamic multi-sector country Ricardian trade model that incorporates both search frictions and labor mobility frictions. I then structurally estimate this model using cross-country sector-level data and quantify both the potential losses to workers and benefits to consumers arising from China’s integration into the global economy. I find that overall welfare increases in northern economies, both in the transition period and in the new steady state equilibrium. In import competing sectors, however, workers bear a costly transition, experiencing lower wages and a rise in unemployment. I validate the micro implications of the model using employer-employee panel data.

Suggested Citation

  • Pessoa, João Paulo, 2016. "International competition and labor market adjustment," LSE Research Online Documents on Economics 66426, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:66426
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    1. International competition and labor market adjustment
      by Christian Zimmermann in NEP-DGE blog on 2016-06-03 19:00:14

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    Cited by:

    1. Costa, Francisco & Garred, Jason & Pessoa, João Paulo, 2016. "Winners and losers from a commodities-for-manufactures trade boom," Journal of International Economics, Elsevier, vol. 102(C), pages 50-69.
    2. Swati Dhingra & Hanwei Huang & Gianmarco Ottaviano & João Paulo Pessoa & Thomas Sampson & John Van Reenen, 2017. "The costs and benefits of leaving the EU: trade effects," Economic Policy, CEPR;CES;MSH, vol. 32(92), pages 651-705.
    3. David H. Autor & David Dorn & Gordon H. Hanson, 2016. "The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 205-240, October.
    4. Arnorsson, Agust & Zoega, Gylfi, 2018. "On the causes of Brexit," European Journal of Political Economy, Elsevier, vol. 55(C), pages 301-323.
    5. David H. Autor, 2018. "Trade and labor markets: Lessons from China’s rise," IZA World of Labor, Institute of Labor Economics (IZA), pages 431-431, February.
    6. Brussevich, Masha, 2018. "Does trade liberalization narrow the gender wage gap? The role of sectoral mobility," European Economic Review, Elsevier, vol. 109(C), pages 305-333.

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    More about this item

    Keywords

    trade; unemployment; earnings; China;
    All these keywords.

    JEL classification:

    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns
    • J01 - Labor and Demographic Economics - - General - - - Labor Economics: General

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