Working Paper: NBER ID: w24560
Authors: Felipe Benguria; Felipe Saffie; Sergio Urza
Abstract: We examine two key channels through which commodity price super-cycles affect the economy: a wealth channel, through which higher commodity prices increase domestic demand, and a cost channel, through which they induce wage increases. By exploiting regional variation in exposure to commodity price shocks and administrative firm-level data from Brazil, we empirically disentangle these transmission channels. We introduce a dynamic, two-region model with heterogeneous firms and workers to further quantify the mechanisms and evaluate welfare. A counterfactual economy in which commodity booms are purely endowment shocks experiences only 45% of the intersectoral labor reallocation between tradables and nontradables, and 40% of the within-tradables labor reallocation between domestic and exported production. Labor market frictions lead to persistent unemployment as the boom fades, and as a result the welfare gains obtained from a commodity super-cycle are 50% lower relative to those which would be obtained under a fully-flexible labor market.
Keywords: Commodity Price Supercycles; Labor Market Dynamics; Wealth Channel; Cost Channel
JEL Codes: E32; F16; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Commodity price boom (Q33) | Increased domestic demand (R22) |
| Increased domestic demand (R22) | Benefits local non-exporting firms more than exporters (F14) |
| Commodity price increase (Q02) | Increased employment in local firms (J68) |
| Commodity price increase (Q02) | Decreased employment in exporting firms (F66) |
| Commodity price increase (Q02) | Employment contractions in less skilled industries (F66) |
| One log point increase in regional commodity price index (Q02) | 0.14 log point decline in employment in the tradable sector (F66) |
| Labor market frictions (J29) | Resulting unemployment during commodity busts (J64) |