Working Paper: CEPR ID: DP10886
Authors: Marius Brülhart; Céline Carrère; Frédéric Robert-Nicoud
Abstract: We study the effects of changes in trade openness on wages and employment of different-sized towns. To this end, we develop a multi-region model of intra-national adjustment to trade shocks. In equilibrium, small towns have more elastic labor-force responses than large towns. We test this prediction using fine-grained regional data for Austria and the fall of the Iron Curtain as a quasi-experimental setting for the exploration of trade-induced spatial effects. We find improved access to foreign markets to boost both employment and nominal wages, but large towns tend to have larger wage responses and smaller employment responses than small towns. The welfare gains of immobile factors are estimated to be 40% higher in border towns compared to interior towns.
Keywords: City Size; Natural Experiment; Spatial Adjustment; Trade Liberalization
JEL Codes: F15; R11; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | Increase in employment (J23) |
| Trade liberalization (F13) | Increase in nominal wages (J39) |
| Larger towns (N93) | Larger wage responses (J39) |
| Smaller towns (R12) | Greater employment responses (J68) |
| Trade liberalization (F13) | Welfare gains in border towns (D69) |
| Larger towns (N93) | Less elastic labor supply (J29) |
| Larger towns (N93) | Significant wage effects (J31) |
| Employment effects (J68) | No significant difference between small and large towns (H73) |
| Total wage bill (J31) | Invariant with respect to town size (R12) |