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Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock

Author

Listed:
  • Caliendo, Lorenzo

    (Yale University and NBER)

  • Dvorkin, Maximiliano

    () (Federal Reserve Bank of St. Louis)

  • Parro, Fernando

    (Federal Reserve Board.)

Abstract

We develop a dynamic trade model with spatially distinct labor markets facing varying exposure to international trade. The model captures the role of labor mobility frictions, goods mobility frictions, geographic factors, and input-output linkages in determining equilibrium allocations. We show how to solve the equilibrium of the model and take the model to the data without assuming that the economy is at a steady state and without estimating productivities, migration frictions, or trade costs, which can be difficult to identify. We calibrate the model to 22 sectors, 38 countries, and 50 U.S. states. We study how the rise in China's trade for the period 2000 to 2007 impacted U.S. households across more than a thousand U.S. labor markets distinguished by sector and state. We find that the China trade shock resulted in a loss of 0.8 million U.S. manufacturing jobs, about 25% of the observed decline in manufacturing employment from 2000 to 2007. The U.S. gains in the aggregate but, due to trade and migration frictions, the welfare and employment effects vary across U.S. labor markets. Estimated transition costs to the new long-run equilibrium are also heterogeneous and reflect the importance of accounting for labor dynamics.

Suggested Citation

  • Caliendo, Lorenzo & Dvorkin, Maximiliano & Parro, Fernando, 2015. "Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock," Working Papers 2015-9, Federal Reserve Bank of St. Louis, revised 29 Jan 2019.
  • Handle: RePEc:fip:fedlwp:2015-009
    DOI: 10.20955/wp.2015.009
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Labor market dynamics; international trade; migration; internal trade; economic geography; mobility frictions; trade costs; input-output linkages; China’s trade; welfare effects; general equilibrium; manufacturing employment;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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