Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence

68 Pages Posted: 12 Feb 2019

See all articles by Rodrigo Adao

Rodrigo Adao

University of Chicago - Booth School of Business

Costas Arkolakis

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Federico Esposito

Tufts University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: February 10, 2019

Abstract

How do shocks to economic fundamentals in the world economy affect local labor markets? In a framework with a flexible structure of spatial linkages, we characterize the model-consistent shock exposure of a local market as the exogenous shift in its production revenues and consumption costs. In general equilibrium, labor outcomes in any market respond directly to the market's own shock exposure, and indirectly to other markets shocks exposures. We show how spatial linkages control the size and the heterogeneity of these indirect effects. We then develop a new estimation methodology — the Model-implied Optimal IV (MOIV) — that exploits quasi-experimental variation in economic shocks to estimate spatial linkages and evaluate their counterfactual implications. Applying our methodology to US Commuting Zones, we find that difference-in-difference designs based on model-consistent measures of local shock exposure approximate well the differential effect of international trade shocks across CZs, but miss around half of the aggregate effect, partly due to the offsetting action of indirect effects.

Suggested Citation

Adao, Rodrigo and Arkolakis, Costas and Esposito, Federico, Spatial Linkages, Global Shocks, and Local Labor Markets: Theory and Evidence (February 10, 2019). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-10, Available at SSRN: https://ssrn.com/abstract=3332087 or http://dx.doi.org/10.2139/ssrn.3332087

Rodrigo Adao (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://www.rodrigoadao.com

Costas Arkolakis

Yale University - Department of Economics ( email )

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New Haven, CT 06520-8264
United States

National Bureau of Economic Research (NBER)

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Yale University - Cowles Foundation

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Federico Esposito

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States

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