Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock

84 Pages Posted: 7 Oct 2020 Last revised: 1 Apr 2023

See all articles by Andrés Rodríguez-Clare

Andrés Rodríguez-Clare

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Mauricio Ulate

University of California, Berkeley - Department of Economics

José Vásquez

Princeton University

Date Written: October 2020

Abstract

We present a dynamic quantitative trade and migration model that incorporates downward nominal wage rigidities and show how this framework can generate changes in unemployment and labor force participation that match those uncovered by the empirical literature studying the “China shock.” We find that the China shock leads to average welfare increases in most U.S. states, including many that experience elevated unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by more than one fourth. In addition, there are seven states that experience welfare losses in the presence of downward nominal wage rigidity that would have experienced gains without it.

Suggested Citation

Rodríguez-Clare, Andrés and Ulate, Mauricio and Vásquez, José, Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock (October 2020). NBER Working Paper No. w27905, Available at SSRN: https://ssrn.com/abstract=3705115

Andrés Rodríguez-Clare (Contact Author)

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mauricio Ulate

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

José Vásquez

Princeton University

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