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Globalization, Trade Imbalances and Labor Market Adjustment

Author

Listed:
  • Rafael Dix-Carneiro
  • João Paulo Pessoa
  • Ricardo M. Reyes-Heroles
  • Sharon Traiberman

Abstract

We argue that modeling trade imbalances is crucial to understanding transitional dynamics in response to globalization shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) endogenous trade imbalances arising from households' consumption and saving decisions; (b) labor market frictions across and within sectors. We use our model to perform several empirical exercises. We find that the “China shock” accounted for 25% of the decline in US manufacturing between 2000 and 2014—twice the magnitude predicted from a model imposing balanced trade. A concurrent rise in US service employment led to a negligible aggregate unemployment response. We then benchmark our model's predictions for the gains from trade against the popular “ACR” sufficient statistics approach. We find that our predictions for the long-run gains from trade and consumption dynamics significantly diverge.

Suggested Citation

  • Rafael Dix-Carneiro & João Paulo Pessoa & Ricardo M. Reyes-Heroles & Sharon Traiberman, 2021. "Globalization, Trade Imbalances and Labor Market Adjustment," NBER Working Papers 28315, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28315
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    JEL classification:

    • F1 - International Economics - - Trade
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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