Working Paper: CEPR ID: DP17980
Authors: Mauricio Ulate; Jose P. Vasquez; Roman D. Zarate
Abstract: We examine the labor market consequences of recent global supply chain disruptions induced by COVID-19. Specifically, we consider a temporary increase in international trade costs similar to the one observed during the pandemic and analyze its effects on labor market outcomes using a quantitative trade model with downward nominal wage rigidities. Even omitting any health-related impacts of the pandemic, the increase in trade costs leads to a temporary but prolonged decline in U.S. labor force participation. However, there is a temporary increase in manufacturing employment as the United States is a net importer of manufactured goods, which become costlier to obtain from abroad. By contrast, service and agricultural employment experience temporary declines. Nominal frictions lead to temporary unemployment when the shock dissipates, but this depends on the degree of monetary accommodation. Overall, the shock results in a 0.14% welfare loss for the United States. The impact on labor force participation and welfare across countries varies depending on the initial degree of openness and sectoral deficits.
Keywords: supply chain disruptions; trade costs; downward nominal wage rigidity
JEL Codes: F10; F11; F16; F40; F66
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| temporary increase in international trade costs (F69) | prolonged decline in U.S. labor force participation (J49) |
| temporary increase in international trade costs (F69) | shift towards home production (D13) |
| shift towards home production (D13) | reduction in labor force participation (J22) |
| temporary increase in international trade costs (F69) | temporary rise in manufacturing employment (L69) |
| temporary rise in manufacturing employment (L69) | increase in manufacturing sector wages (J39) |
| temporary increase in international trade costs (F69) | decline in service employment (J68) |
| temporary increase in international trade costs (F69) | decline in agricultural employment (J43) |
| nominal wage rigidity (J31) | temporary unemployment (J65) |
| temporary unemployment (J65) | impacts on labor force participation (J21) |
| larger service sectors (L89) | greater declines in labor force participation (J21) |
| larger manufacturing sectors (L69) | smaller declines in labor force participation (J49) |