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Globalization, Trade Imbalances and Labor Market Adjustment

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Abstract

We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) Consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances; (b) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and inter-temporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the "China Shock" through the lens of our model. We show that the US enjoys a 2.2 percent gain in response to globalization shocks. These gains would have been 73 percent larger in the absence of the global savings glut, but they would have been 40 percent smaller in a balanced-trade world.

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  • Rafael Dix-Carneiro & João Paulo Pessoa & Ricardo M. Reyes-Heroles & Sharon Traiberman, 2021. "Globalization, Trade Imbalances and Labor Market Adjustment," International Finance Discussion Papers 1310, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:1310
    DOI: 10.17016/IFDP.2021.1310
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    1. Globalization, Trade Imbalances, and Labor Market Adjustment
      by Christian Zimmermann in NEP-DGE blog on 2021-04-05 21:16:45

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    Cited by:

    1. Andres Rodriguez-Clare & Mauricio Ulate & Jose P. Vasquez, 2020. "New-Keynesian Trade: Understanding the Employment and Welfare Effects of Trade Shocks," Working Papers 265, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. Rafael Dix-Carneiro, 2019. "Trade and Informality in the Presence of Labor Market Frictions and Regulations," 2019 Meeting Papers 144, Society for Economic Dynamics.
    3. Stephen J. Redding, 2020. "Trade and geography," CEP Discussion Papers dp1718, Centre for Economic Performance, LSE.
    4. Autor, David & Dorn, David & Hanson, Gordon, 2021. "On the Persistence of the China Shock," CEPR Discussion Papers 16688, C.E.P.R. Discussion Papers.
    5. Dorn, David & Levell, Peter, 2021. "Trade and Inequality in Europe and the US," CEPR Discussion Papers 16780, C.E.P.R. Discussion Papers.
    6. Mariarosaria Comunale & Justas Dainauskas & Povilas Lastauskas, 2021. "What explains excess trade persistence? A theory of habits in the supply chains," CAMA Working Papers 2021-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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    More about this item

    Keywords

    Globalization; Labor markets; Trade imbalances;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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