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Globalization, Trade Imbalances, and Labor Market Adjustment*

Abstract

We argue that modeling trade imbalances is crucial to understanding transitional dynamics in response to globalization shocks. We build and estimate a general equilibrium, multicountry, multisector model of trade with two key ingredients: (a) endogenous trade imbalances arising from households’ consumption and saving decisions; (b) 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 US manufacturing between 2000 and 2014—1.65 times the magnitude predicted from a model imposing balanced trade. A concurrent rise in US service employment led to a negligible aggregate unemployment response. We then 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.

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Posted in: Journal Article Abstracts on 01/05/2023 | Link to this post on IFP |
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