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

95 Pages Posted: 19 Aug 2015 Last revised: 21 Feb 2019

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: 2015-05-01

Abstract

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.

Keywords: Labor market dynamics, international trade, migration, internal trade, economic geography, mobility frictions, trade costs, input-output linkages, China’s trade, welfare effects, general equilibrium, manufacturing employment

JEL Classification: E24, F16, J62, R13, R23

Suggested Citation

Caliendo, Lorenzo and Dvorkin, Maximiliano A. and Parro, Fernando, Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock (2015-05-01). FRB St. Louis Working Paper No. 2015-9, Available at SSRN: https://ssrn.com/abstract=2646148 or http://dx.doi.org/10.20955/wp.2015.009

Lorenzo Caliendo (Contact Author)

Yale University - School of Management ( email )

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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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