The Impact of Trade on Labor Market Dynamics

41 Pages Posted: 11 May 2015 Last revised: 16 Apr 2021

See all articles by Lorenzo Caliendo

Lorenzo Caliendo

Yale University - School of Management

Maximiliano A. Dvorkin

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Fernando Parro

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: May 2015

Abstract

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 difficult 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 aggregate and disaggregate employment and welfare effects on the U.S. economy. We find that China's import competition growth resulted in 0.6 percentage point reduction in the share of manufacturing employment, approximately 1 million jobs lost, or about 60% of the change in the manufacturing employment share not explained by a secular trend. Overall, China's shock increases U.S. welfare by 6.7% in the long-run and by 0.2% in the short-run with very heterogeneous effects across labor markets.

Suggested Citation

Caliendo, Lorenzo and Dvorkin, Maximiliano A. and Parro, Fernando, The Impact of Trade on Labor Market Dynamics (May 2015). NBER Working Paper No. w21149, Available at SSRN: https://ssrn.com/abstract=2604830

Lorenzo Caliendo (Contact Author)

Yale University - School of Management ( email )

135 Prospect Street
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HOME PAGE: http://faculty.som.yale.edu/lorenzocaliendo

Maximiliano A. Dvorkin

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Fernando Parro

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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