Labor Market Effects of Global Supply Chain Disruptions

This paper examines the labor market consequences of recent global supply chain disruptionsinduced by COVID-19. Specifically, it considers a temporary increase in international trade costs similar to the oneobserved during the pandemic and analyzes its effects on labor market outcomes using a quantitative trade model withdownward nominal wage rigidities. Even omitting any health-related impacts of the pandemic, the increase intrade costs leads to a temporary but prolonged decline in U.S. labor force participation. However, there is atemporary increase in manufacturing employment as the United States is a net importer of manufactured goods, which becomecostlier to obtain from abroad. By contrast, service and agricultural employment experience temporary declines.Nominal frictions lead to temporary unemployment when the shock dissipates, but this depends on the degree of monetaryaccommodation. Overall, the shock results in a 0.14 percent welfare loss for the United States. The impact on laborforce participation and welfare across countries varies depending on the initial degree of openness and sectoral deficits.