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Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock

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  • Andrés Rodríguez-Clare
  • Mauricio Ulate
  • José P. Vásquez

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 force 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 elevated unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by more than one fourth. In addition, there are seven states that experience welfare losses in the presence of downward nominal wage rigidity that would have experienced gains without it.

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  • Andrés Rodríguez-Clare & Mauricio Ulate & José P. Vásquez, 2020. "Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock," NBER Working Papers 27905, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27905
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    1. David Autor & David Dorn & Gordon Hanson, 2021. "On the Persistence of the China Shock," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 52(2 (Fall)), pages 381-476.
    2. Rafael Dix-Carneiro & João Paulo Pessoa & Ricardo Reyes-Heroles & Sharon Traiberman, 2023. "Globalization, Trade Imbalances, and Labor Market Adjustment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(2), pages 1109-1171.
    3. Ana Maria Santacreu & Michael Sposi & Jing Zhang, 2021. "What Determines State Heterogeneity in Response to US Tariff Changes?," Working Papers 2021-007, Federal Reserve Bank of St. Louis, revised 08 Mar 2023.
    4. Dorn, David & Levell, Peter, 2021. "Trade and Inequality in Europe and the US," CEPR Discussion Papers 16780, C.E.P.R. Discussion Papers.
    5. Esposito, Federico & Hassan, Fadi, 2023. "Import competition, trade credit and financial frictions in general equilibrium," LSE Research Online Documents on Economics 121378, London School of Economics and Political Science, LSE Library.
    6. Stephen J. Redding, 2020. "Trade and Geography," NBER Working Papers 27821, National Bureau of Economic Research, Inc.
    7. Hassan, Fadi & Esposito, Federico, 2023. "Import Competition, Trade Credit, and Financial Frictions in General Equilibrium," CEPR Discussion Papers 17926, C.E.P.R. Discussion Papers.
    8. Andrés Rodríguez-Clare & Mauricio Ulate & Jose P. Vasquez, 2023. "Supply Chain Disruptions, Trade Costs, and Labor Markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2023(02), pages 1-5, January.
    9. Pedro Dias Moreira & João Monteiro, 2023. "The Impact of a Higher Cost of Credit on Exporters: Evidence from a Change in Banking Regulation," Working Papers w202320, Banco de Portugal, Economics and Research Department.
    10. Komarek, Timothy M. & Butts, Kyle & Wagner, Gary A., 2022. "Government Contracting, Labor Intensity, and the Local Effects of Fiscal Consolidation: Evidence from the Budget Control Act of 2011," Journal of Urban Economics, Elsevier, vol. 132(C).
    11. Leonard Bocquet, 2022. "The Network Origin of Slow Labor Reallocation," Working Papers halshs-03703862, HAL.

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F66 - International Economics - - Economic Impacts of Globalization - - - Labor

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