Globalization, trade imbalances and labor market adjustment

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, multi-country, multi-sector model of trade with two key ingredients: (a) Consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances; (b) 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 inter-temporal 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 US enjoys a 2.2% gain in response to globalization shocks. These gains would have been 73% larger in the absence of the global savings glut, but they would have been 40% smaller in a balanced-trade world

Essays in International Economics

This collection of essays examines different topics in international economics. The first two chapters study the role that declines in trade barriers play in shaping the world distribution of net exports, also known as trade imbalances, and sectoral reallocation of economic activity in the U.S., a process also known as structural transformation. The third chapter is co-authored with Gabriel Tenorio and studies optimal capital account policy in small open economies subject to the risks of volatility in international interest rates. The first chapter proposes a framework that embeds a quantitative multi-country general equilibrium model of international trade into a dynamic framework in which trade imbalances arise endogenously. I calibrate the model and provide a decomposition that shows that 69 percent of the increase in world trade imbalances between 1970 and 2007 can be explained by the decline in trade costs across countries. Moreover, the effect of lower trade costs on trade imbalances is heterogeneous across countries. The second chapter considers a static general equilibrium open economy model of structural transformation to explore the implications of lower trade costs and trade deficits on structural change in the U.S. The results show that declining trade costs and increasing trade deficits in the U.S. between 1970 and 2007 significantly contributed to the decline in manufacturing's share in value added. In the absence of declines in trade costs and imbalances, the decline in this share is approximately half of the decline in the baseline calibration of the model. In the third chapter we study optimal policy responses to shocks in the mean and volatility of the external interest rate in a small open economy with an occasionally binding borrowing constraint. We show that the modeled evolution of interest rates around episodes of sudden stops is consistent with the empirical evidence for a group emerging markets. We solve the problem of a constrained social planner and show numerically that policy is contingent on the level and volatility of external interest rate shocks, and that the intensity of the optimal policy is nonmonotonic with respect to the volatility of external shocks

Globalization, Trade Imbalances, and Labor Market Adjustment

Why should we care about trade deficits? According to prominent theories of trade imbalances, trade deficits are a mechanism through which nations insure against negative shocks and smooth consumption over time; indeed, in these models the deficit has no bearing on the actual implications of trade shocks. This research argues that in more realistic settings with slow and imperfect reallocation of resources across sectors, trade deficits can have important implications for the adjustment process in response to trade shocks (such as trade liberalization or the emergence of China as a major global player). Concretely, maintaining large trade deficits for extended periods of time can substantially prolong the pain of trade-displaced workers, magnifying the unequal effects of trade on workers. If the government\u27s objective function penalizes inequality, this magnification effect of can have important trade policy implications

Globalization, trade imbalances, and labor market adjustment

We argue that modeling trade imbalances is crucial for understanding transitional dynamics in response to globalization shocks. We build and estimate a general equilibrium, multicountry, multisector model of trade with two key ingredients: (i) endogenous trade imbalances arising from households' consumption and saving decisions; (ii) labor market frictions across and within sectors. We use our model to perform several empirical exercises. We find that the "China shock"accounted for 28% of the decline in U.S. manufacturing between 2000 and 2014 - 1.65 times the magnitude predicted from a model imposing balanced trade. A concurrent rise in U.S. service employment led to a negligible aggregate unemployment response. We benchmark our model's predictions for the gains from trade against the popular ACR sufficient-statistics approach. We find that our predictions for the long-run gains from trade and consumption dynamics significantly diverge

Labor Market Polarization, the Decline of Routine Work, and Technological Change: A Quantitative Analysis * Christian vom Lehn †

Abstract Technological change is a prominent hypothesis for the recent polarization of the labor market and the related decline for occupations specializing in performing routine tasks. In this paper, I provide a quantitative evaluation of this hypothesis. To do so, I build an extension of the standard growth model which allows for endogenous determination of the demand and supply for occupational labor in response to investment specific technological change. I further evaluate the extent to which this channel of technological change can account for recent declines in aggregate employment and the labor share of income. My analysis finds that technological change is able to account for a large fraction of changes in occupational employment and earnings, as well as the decline in the labor share, through the year 2000, but is unable to reconcile many of these patterns in the subsequent decade. In particular, after 2000, the model significantly overpredicts wages and hours for higher skilled occupations. This is at odds with both the recent measured slowdown in demand for these occupations as well as the hypothesis that slowing technological change can account for this phenomenon. JEL codes: E24, J24, O33 * I am deeply indebted to Richard Rogerson, Esteban Rossi-Hansberg, Mark Watson, and Tom Winberry for their feedback on this project. This paper is a substantially revised version of chapter 1 of my PhD dissertation completed at Princeton University. I am also very grateful for helpful comments and suggestions fro