DP17141 Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock

Author(s): Andres Rodriguez-Clare, Mauricio Ulate, Jose P. Vasquez
Publication Date: March 2022
Keyword(s): China shock, nominal rigidities, Trade, unemployment
JEL(s): F10, F16
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17141

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.