Must-Read: I gotta go back and reread Blanchard and Katz on regional adjustment in the early 1992. How much of it is that adjustment is faster? How much of it is that the shock they study–to LA-sector aerospace employment–was different? How much of it is that back then aggregate demand policy was supportive of adjustment?
: Adjusting to Economic Shocks Tougher: “In the last six months a burst of new empirical work…
…much of it focused on the region-by-region aftermath of the Great Recession—is shredding key aspects of the standard view and suggesting a much tougher path to adjustment for people and places…. Joe Parilla and Amy Liu, David Autor, David Dorn, and Gordon Hanson focus on the ‘stunningly slow’ adjustment of exposed local labor markets to the ‘China shock’ and argue that the story challenges ‘much of the received empirical wisdom about how labor markets adjust to trade shocks.’
Autor and his colleagues do not see much evidence at all of a frictionless labor market in which the rapid mobility of workers across firms, industries, and regions guarantees rapid adjustment to new realities. Instead they see a series of slow-moving crises in particular metro areas. ‘Switching costs’ and other frictions inhibit workers’ ability to shift quickly to new, less-threatened firms or industries. Many workers never recoup lost earnings and depend more on transfer payments. Little offsetting growth is detected in industries not exposed to the shock…