Working Paper: NBER ID: w25544
Authors: Rodrigo Ado; Costas Arkolakis; Federico Esposito
Abstract: How do international trade shocks affect spatially connected regional markets? We answer this question by extending shift-share empirical specifications to incorporate general equilibrium effects that arise in spatial models. In partial equilibrium, regional shock exposure has a shift-share structure: it is the average shock weighted by regional exposure shares in revenue and consumption. General equilibrium responses of employment and wages in each market are the sum, across all regions, of these shift-share measures times bilateral reduced-form elasticities determined by the economy's spatial links. We use this reduced-form representation of the model to efficiently estimate the bilateral elasticities exploiting exogenous variation in shock exposure across markets. Finally, we study the general equilibrium impact of the “China shock” on U.S. CZs using our model-consistent generalization of the specification in Autor et al. (2013). We find that indirect effects from the shock exposure of other markets reinforce the negative impact of the market's own shock exposure, leading to employment and wage losses that are significantly larger than those reported in the existing literature.
Keywords: International Trade; Labor Markets; General Equilibrium Effects
JEL Codes: F1; F14; F16; R1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade shocks (F14) | Employment (J68) |
| Trade shocks (F14) | Wages (J31) |
| Shock exposure of neighboring markets (F69) | Employment (J68) |
| Shock exposure of neighboring markets (F69) | Wages (J31) |
| Trade shocks + Shock exposure of neighboring markets (F41) | Employment (J68) |
| Trade shocks + Shock exposure of neighboring markets (F41) | Wages (J31) |