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Title: Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock

Author(s): Andres Rodriguez-Clare, Mauricio Ulate and Jose P. Vasquez

Publication Date: March 2022

Keyword(s): China shock, nominal rigidities, Trade and unemployment

Programme Area(s): International Trade and Regional Economics

Abstract: We present a dynamic quantitative trade and migration model that incorporates downward nominal wage rigidities and show how this framework can generate changes in unemployment and labor participation that match those uncovered by the empirical literature studying the ``China shock.'' We find that the China shock leads to average welfare increases in most U.S. states, including many that experience unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by around one fourth. In addition, there are seven states that experience welfare losses in the presence of downward nominal wage rigidity that would have experienced gains without it.

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Bibliographic Reference

Rodriguez-Clare, A, Ulate, M and Vasquez, J. 2022. 'Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=17141