China's emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in the US industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. Better understanding when and where trade is ...

https://www.nber.org/system/files/working_papers/w21906/w21906.pdf

The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade

This paper estimates a structural dynamic equilibrium model of the Brazilian labor market in order to study trade-induced transitional dynamics. The model features a multi-sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector-specific experience, and costly switching of sectors. The model's estimates yield median costs of mobility ranging from 1.4 to 2.7 times annual average wages, but a high dispersion of these costs across the population. In addition, sector-specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model for counterfactual trade liberalization experiments, the main findings are: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly reduced due to the delayed adjustment; (3) trade-induced welfare effects depend on initial sector of employment and on worker demographics such as age and education. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of capital.

/pdf/trade-liberalization-and-labor-market-dynamics-5213gbf7xg.pdf

Trade Liberalization and Labor Market Dynamics

We study the evolution of trade liberalization's effects on Brazilian local labor markets. Regions facing larger tariff cuts experienced prolonged declines in formal sector employment and ...

/pdf/trade-liberalization-and-regional-dynamics-1zyhs1i688.pdf

Trade Liberalization and Regional Dynamics

This paper estimates the welfare effects of Brexit, focusing on trade and fiscal transfers. We use a standard quantitative general equilibrium trade model with many countries and sectors and trade in intermediates, as in Costinot and Rodriguez-Clare (2014). We simulate a range of counterfactuals reflecting alternative options for EU-UK relations following Brexit. Welfare losses for the average UK household are 1.3% if the UK remains in the EU's Single Market like Norway (a “soft Brexit”).Losses rise to 2.7% if the UK trades with the EU under World Trade Organization rules (a “hard Brexit”). A reduced form approach that captures the dynamic effects of Brexit on productivity more than riples these losses and implies a decline in average income per capita of between 6.3% and 9.4%, partly via falls in foreign investment. These negative effects are widely shared across the entire income distribution and are unlikely to be offset from new trade deals.

/pdf/the-costs-and-benefits-of-leaving-the-eu-trade-effects-3r3ufr96mg.pdf

The costs and benefits of leaving the EU: trade effects

We study how misallocation due to goods- and labour-market frictions affect aggregate productivity in China. Combining unique data with a general equilibrium model of internal and international trade, and migration across regions and sectors, we quantify the magnitude and consequences of trade and migration costs. The costs were high in 2000, but declined afterward. The decline accounts for roughly twofifths of aggregate labour productivity growth in China between 2000 and 2005. Reductions in internal rather than international costs are particularly important. Despite the decline, migration costs are still high and potential gains from further reform are large.

/pdf/trade-migration-and-productivity-a-quantitative-analysis-of-3beoo8ygh5.pdf

Trade, Migration, and Productivity: A Quantitative Analysis of China

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.

/pdf/trade-and-labor-market-dynamics-general-equilibrium-analysis-1ytm9ivpyp.pdf

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

We develop a dynamic labor search model where production and consumption take place in spatially distinct labor markets with varying exposure to domestic and international trade. The model recognizes 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 without estimating productivities, reallocation frictions, or trade frictions, which are usually di¢ cult to identify. We use the model to study the dynamic labor market outcomes of aggregate trade shocks. We calibrate the model to 38 countries, 50 U.S. states and 22 sectors and use the rise in China’s import competition to quantify the � ;

/pdf/the-impact-of-trade-on-labor-market-dynamics-2ghqtw0z7s.pdf

The Impact of Trade on Labor Market Dynamics

We develop a dynamic trade model where production and consumption take place in spatially distinct labor markets with varying exposure to domestic and international trade. The model recognizes 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 without estimating productivities, migration frictions, or trade costs, which are usually diÂ¢ cult to identify. We calibrate the model to 38 countries, 50 U.S. states, and 22 sectors and use the rise in Chinaâ€™s import competition to quantify the effects across more than a thousand U.S. labor markets. We find that Chinaâ€™s trade shock resulted in a loss of 0.8 million U.S. manufacturing jobs, about 50 percent of the change in the manufacturing employment share unexplained by a secular trend. We find aggregate welfare gains 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.

Trade and Labor Market Dynamics

Sovereign debt crises involve debt restructurings characterized by a mix of face-value haircuts and maturity extensions. The prevalence of maturity extensions has been hard to reconcile with economic theory. We develop a model of endogenous debt restructuring that captures key facts of sovereign debt and restructuring episodes. While debt dilution pushes for negative maturity extensions, three factors are important in overcoming the effects of dilution and generating maturity extensions upon restructurings: income recovery after default, credit exclusion after restructuring, and regulatory costs of book-value haircuts. We employ dynamic discrete choice methods that allow for smoother decision rules, rendering the problem tractable.

Sovereign Debt Restructurings

This paper makes three contributions. First, on the technical side, I adapt and extend numerical techniques to solve a Lucas & Prescott (1974) type of model with a sufficiently large number of islands and aggregate uncertainty. The main difficulty in these models is that the whole distribution of wages and economic conditions over islands is part of the state variables in the worker's decision problem, and with aggregate uncertainty this distribution is not time invariant. Second, I analyze the cyclical properties of island models. Despite the original paper was published almost 40 years ago, little is known about the business cycle properties of this model. Last, I use the model to quantify the importance of sectoral shocks in generating cyclical fluctuations in the labor market and in particular, whether the dynamics of the labor market in the Great Recession are a result of a adverse sectoral shocks or a weak aggregate demand.

Maximiliano Dvorkin

Papers

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

The Impact of Trade on Labor Market Dynamics

Trade and Labor Market Dynamics

Sovereign Debt Restructurings

Sectoral Shocks, Reallocation and Unemployment in a Model of Competitive Labor Markets