Must-read: Lorenzo Caliendo et al.: “Trade and Labor Market Dynamics”

Must-Read: Lorenzo Caliendo et al.: Trade and Labor Market Dynamics: “We develop a dynamic trade model…

…where production and consumption take place in spatially distinct labor markets with varying exposure to domestic and international trade. The model recognizes the role of labor mobility frictions, goods mobility frictions, geographic factors, and input-output linkages in determining equilibrium allocations. We show how to solve the equilibrium of the model without estimating productivities, migration frictions, or trade costs, which are usually di¢ cult to identify. We calibrate the model to 38 countries, 50 U.S. states, and 22 sectors and use the rise in Chinaís import competition to quantify the e§ects across more than a thousand U.S. labor markets. We find that China’s trade shock resulted in a loss of 0.8 million U.S. manufacturing jobs, about 50 percent of the change in the manufacturing employment share unexplained by a secular trend. We find aggregate welfare gains but, due to trade and migration frictions, the welfare and employment e§ects vary across U.S. labor markets. Estimated transition costs to the new long-run equilibrium are also heterogeneous and reflect the importance of accounting for labor dynamics.