Globalization, Trade Imbalances, and Labor Market Adjustment

96 Pages Posted: 22 Mar 2021

See all articles by Rafael Dix-Carneiro

Rafael Dix-Carneiro

Duke University

Joao Paulo Pessoa

Getulio Vargas Foundation (FGV), Sao Paulo School of Economics, Students; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Ricardo Reyes-Heroles

Board of Governors of the Federal Reserve System

Sharon Traiberman

New York University (NYU) - New York University

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Date Written: March 18, 2021

Abstract

We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multicountry, multisector model of trade with two key ingredients: 1) consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances, and 2) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and intertemporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the “China Shock” through the lens of our model. We show that the U.S. enjoys a 2.2 percent gain in response to globalization shocks. These gains would have been 73 percent larger in the absence of the global savings glut, but they would have been 40 percent smaller in a balanced-trade world.

Keywords: Globalization, Trade Imbalances, Labor Markets, Unemployment

JEL Classification: F16

Suggested Citation

Dix-Carneiro, Rafael and Pessoa, Joao Paulo and Reyes-Heroles, Ricardo and Traiberman, Sharon, Globalization, Trade Imbalances, and Labor Market Adjustment (March 18, 2021). Available at SSRN: https://ssrn.com/abstract=3807163 or http://dx.doi.org/10.2139/ssrn.3807163

Rafael Dix-Carneiro (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Joao Paulo Pessoa

Getulio Vargas Foundation (FGV), Sao Paulo School of Economics, Students ( email )

Rua Itapeva 474 s.1202
São Paulo
Brazil

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Ricardo Reyes-Heroles

Board of Governors of the Federal Reserve System ( email )

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

Sharon Traiberman

New York University (NYU) - New York University

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