Magnification of the ‘China Shock’ Through the U.S. Housing Market

Abstract

The ‘China shock’ operated in part through the housing market, which is one reason why its impact was so large on U.S. labor market. We add housing to a multi-region monopolistic competition model, with individuals choosing whether and where to work. Controlling for housing reduces the negative coefficient of import exposure on manufacturing employment by 20-25%, with a significant indirect magnification through the housing market. Combining manufacturing and construction employment, the indirect effect of the China shock through the housing market explains one-fifth as much of the variance in employment as the direct effect of import exposure, with further employment impacts through independent fluctuations in the housing market.

Keywords: China Trade Shock, employment, Housing Market