Discussion Paper Details

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Title: Trade and Towns: Heterogeneous Adjustment to a Border Shock

Author(s): Marius Brülhart, Céline Carrčre and Frédéric Robert-Nicoud

Publication Date: October 2015

Keyword(s): city size, natural experiment, spatial adjustment and trade liberalization

Programme Area(s): International Trade and Regional Economics

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.

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Bibliographic Reference

Brülhart, M, Carrčre, C and Robert-Nicoud, F. 2015. 'Trade and Towns: Heterogeneous Adjustment to a Border Shock'. London, Centre for Economic Policy Research.