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

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  • Rodríguez-Clare, Andres
  • Ulate, Mauricio
  • Vasquez, Jose P.

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 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 unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by around 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.

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  • Rodríguez-Clare, Andres & Ulate, Mauricio & Vasquez, Jose P., 2022. "Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock," CEPR Discussion Papers 17141, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17141
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    Cited by:

    1. Lechthaler, Wolfgang & Mileva, Mariya, 2024. "Trade liberalization, wage inequality, and monetary policy," Journal of International Money and Finance, Elsevier, vol. 143(C).
    2. Adao, Rodrigo & Costinot, Arnaud & Donaldson, Dave & Sturm Becko, John, 2023. "Why is Trade Not Free? A Revealed Preference Approach," CEPR Discussion Papers 18567, C.E.P.R. Discussion Papers.
    3. Rafael Dix-Carneiro & João Paulo Pessoa & Ricardo Reyes-Heroles & Sharon Traiberman, 2023. "Globalization, Trade Imbalances, and Labor Market Adjustment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(2), pages 1109-1171.
    4. Adao, Rodrigo & Costinot, Arnaud & Donaldson, Dave & Sturm Becko, John, 2023. "Why is Trade Not Free? A Revealed Preference Approach," CEPR Discussion Papers 18567, C.E.P.R. Discussion Papers.
    5. Pedro Dias Moreira & João Monteiro, 2023. "The Impact of a Higher Cost of Credit on Exporters: Evidence from a Change in Banking Regulation," Working Papers w202320, Banco de Portugal, Economics and Research Department.
    6. David Autor & David Dorn & Gordon Hanson, 2021. "On the Persistence of the China Shock," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 52(2 (Fall)), pages 381-476.
    7. Ana Maria Santacreu & Michael Sposi & Jing Zhang, 2021. "What Determines State Heterogeneity in Response to US Tariff Changes?," Working Papers 2021-007, Federal Reserve Bank of St. Louis, revised 08 Mar 2023.
    8. Stephen J. Redding, 2020. "Trade and geography," CEP Discussion Papers dp1718, Centre for Economic Performance, LSE.
    9. Dorn, David & Levell, Peter, 2021. "Trade and Inequality in Europe and the US," CEPR Discussion Papers 16780, C.E.P.R. Discussion Papers.
    10. Komarek, Timothy M. & Butts, Kyle & Wagner, Gary A., 2022. "Government Contracting, Labor Intensity, and the Local Effects of Fiscal Consolidation: Evidence from the Budget Control Act of 2011," Journal of Urban Economics, Elsevier, vol. 132(C).
    11. Esposito, Federico & Hassan, Fadi, 2023. "Import competition, trade credit and financial frictions in general equilibrium," LSE Research Online Documents on Economics 121378, London School of Economics and Political Science, LSE Library.
    12. Tom Schmitz & Italo Colantone & Gianmarco Ottaviano, 2024. "Regional and Aggregate Economic Consequences of Environmental Policy," Working Papers 2024.10, Fondazione Eni Enrico Mattei.
    13. Leonard Bocquet, 2022. "The Network Origin of Slow Labor Reallocation," Working Papers halshs-03703862, HAL.
    14. Esposito, Federico & Hassan, Fadi, 2023. "Import Competition, Trade Credit, and Financial Frictions in General Equilibrium," CEPR Discussion Papers 17926, C.E.P.R. Discussion Papers.
    15. Ravikumar, B. & Santacreu, Ana Maria & Sposi, Michael, 2024. "Trade liberalization versus protectionism: Dynamic welfare asymmetries," European Economic Review, Elsevier, vol. 163(C).
    16. Tom Schmitz & Italo Colantone & Gianmarco Ottaviano, 2024. "Regional and Aggregate Economic Consequences of Environmental Policy Abstract: This paper shows how to combine microeconometric evidence on the effects of environmental policy with a macroeconomic mod," BAFFI CAREFIN Working Papers 24225, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    17. Andrés Rodríguez-Clare & Mauricio Ulate & Jose P. Vasquez, 2023. "Supply Chain Disruptions, Trade Costs, and Labor Markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2023(02), pages 1-5, January.

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    More about this item

    Keywords

    Trade; China shock; Unemployment; Nominal rigidities;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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