Local labor market effects of global value chain disruptions - evidence from the COVID-19 crisis

"This study investigates the importance of global value chain (GVC) integration for local labor market outcomes in Germany during the COVID-19 pandemic. Although COVID-19 can be considered as a global crisis, there are at the same time strong geographical differences in its impact. We observe pronounced spatial variation in infection rates, policy responses, and behavioral changes. A rapidly growing number of studies provide evidence of heterogeneous effects of the COVID-19 pandemic on local labor markets, most of them focusing on the initial shock and often on the effects of lockdowns and economic policy measures. This paper takes a different perspective on the regional economic effects of the pandemic. We focus on the impact of disrupted GVC during the COVID-19 crisis on local labor markets and investigate whether GVC integration influenced the magnitude of the initial shock and the subsequent recovery process of regions in Germany until December 2021. Our analysis of the regional effects of GVC disruptions in Germany focuses on the bilateral GVC relationship between China and Germany because the two countries are important agents in GVC. Moreover, China was hit early and severely by the pandemic which led to a sizeable decline in the country's production and exports at the beginning of 2020. To measure regional and sectoral GVC integration, we use the 2021 edition of the OECD's Inter-Country Input-Output tables, which provide detailed information on trade in intermediate goods between 45 industries and 66 countries up to the year 2018. Using this data on international trade in intermediate products, we apply different indicators to measure the GVC integration of German sectors via imports and exports of intermediate inputs. To measure the integration of local labor markets in GVC, we quantify the regional variation in trade in intermediate goods using the variation in sectoral specialization across labor market regions. Our main outcome variable is the regional employment share of workers receiving a short-time work allowance. The extensive use of short-time work (STW) was one reason why the unemployment rate showed a relatively moderate increase during the COVID-19 pandemic in Germany. Therefore, we apply STW rather than regional unemployment rates to measure the labor market effects of GVC disruptions caused by the COVID-19 crisis. As a second outcome variable, we consider regional employment. Our descriptive results point to a clustering of highly integrated regions in southern Germany that appears to be slightly more pronounced for GVC trade with China than for GVC trade with the rest of the world. In contrast, many regions in the Northeast of Germany show a below average GVC integration. A decomposition GVC-related trade into imports and exports shows that the export component is almost twice as large as GVC-related imports in Germany. However, the export and import measures are highly correlated, indicating that when a region is strongly integrated into GVC-related trade, it is usually through both imports and exports. Regression results show that short-time work increased more strongly in 2020 in local labor markets which are characterized by an above average GVC integration with China. We detect significant effects of both an integration through exports and imports of intermediate goods, with the impact of GVC-related imports from China being somewhat stronger. The effects that we find for GVC integration with China are, however, only temporary and decline quickly during the second half of 2020. Regions that are highly integrated with the rest of the world, in contrast, do not stand out from other local labor markets in Germany when it comes to the effects of GVC disruptions. There are different potential reasons behind the swift recovery of those regions that show a high GVC integration with China. First of all, China does not differ that much from other important trade partners of Germany in 2021 when it comes to trade disruptions. Moreover, there is some first evidence on firms adjusting their production process and the procurement of inputs in response to value chain disruptions." (Author's abstract, IAB-Doku) ((en))