Globalization, trade imbalances and labor market adjustment

Dix-Carneiro, Rafael, Pessoa, João Paulo, Reyes-Heroles, Ricardo and Traiberman, Sharon (2021) Globalization, trade imbalances and labor market adjustment. CEP Discussion Papers (1754). Centre for Economic Performance, LSE, London, UK.

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Abstract

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.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2021 The Authors
Divisions:	LSE
Subjects:	H Social Sciences > HF Commerce H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HC Economic History and Conditions
JEL classification:	F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions
Date Deposited:	22 Mar 2022 11:12
Last Modified:	11 Dec 2024 19:40
URI:	http://eprints.lse.ac.uk/id/eprint/114424

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