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

Three Essays in International Economics

This dissertation consists of three essays on the impact that import competition and importing opportunities can have on households. Specifically, I aim to quantify the effects that reductions in trade costs and access to new inputs have on income and on the menu of options available to consumers. I achieve these goals by focusing on the differential impact of import competition on workers with different occupations and different skill levels, and by examining the extent to which import opportunities change firms' output decisions. Chapter 1 examines the role of occupations in understanding who gains and who loses from changes in import costs. From estimating a structural model of the Danish labor market, I find that a substantial portion of the variation in income changes induced by the decline in import costs from 1996 to 2005 is accounted for by one's occupation at the time that costs decrease. Moreover, I find that when workers must engage in costly occupational reallocation, the short run variation in changes to workers' incomes can be substantially larger than in the long run. While chapter 1 explores how workers' incomes respond to changes in import costs, chapter 2 focuses on how firms respond to new importing opportunities. This chapter, co-authored with Valerie Smeets and Frederic Warzynski, uses data on Danish apparel firms to estimate how firms change the quality of their goods when trade costs decrease. We find that access to imports from poorer countries tends to lead firms that produce lower quality goods to upgrade their products, and firms that produce higher quality goods to downgrade theirs. Thus, import competition tends to reduce the dispersion in quality of domestically produced goods. Finally, in the third chapter, I return my focus to workers to explore how the elasticity of substitution between imported intermediates and workers of different skill levels varies across industries. I find significant heterogeneity in this parameter across industries and build a model to demonstrate how this elasticity of substitution can affect how wages between skilled and unskilled workers responds to changes in import costs

Foxes and Hedgehogs: The Role of Personality in Labor Market Adjustment

We study the role of personality and non-cognitive skills in labor market adjustment in response to trade shocks. Specifically, we focus on how these traits mediate the adverse consequences for U.S. workers of rising Chinese imports. We identify plausibly exogenous variation in Chinese import competition across industries in the U.S. using the instrument of Pierce and Schott (2016) and find that personality characteristics (as identified by the Big Five personality test and measures of locus of control) are correlated with an individual’s propensity to switch industry, occupation, and transition out of employment in response to a trade shock. These results are important for understanding labor market adjustment costs, which are a key determinant of the welfare and distributional impacts of trade. For example, these traits can help explain the concurrent increase in mortality of workers dislocated by import competition. The efficacy of job retraining and trade-related retraining also hinge on understanding dislocated workers’ non-cognitive as well as cognitive traits

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