Spoils of War: Trade Shocks and Segmented Labor Markets in Spain during WWI
May 28, 2021
Summary
Exploring one aspect of the trade shock brought on by WWI, the author of this working paper finds that the demand shock that emanated from belligerent countries caused drastic increases in wages and consumer prices, as well as a reallocation of labor, in neutral Spain.
View PaperWorking Paper 2021-14a
Abstract: How do large export-demand shocks propagate across connected labor markets? This paper studies the regional incidence of the WWI trade boom in Spain using newly assembled data on product-destination exports, province-sector wages and employment, and province-product consumer prices (1910-1920). Exploiting plausibly exogenous shifts in foreign demand from belligerent nations, I use a reduced-form design that decomposes exposure into direct (local) effects and spillovers across connected markets. Exposed markets experienced large increases in nominal wages and employment; within-province wage spillovers are roughly half the size of the direct effect. These nominal gains were partially offset by rising local consumer prices. To interpret these patterns, I develop a quantitative spatial equilibrium model with nested labor mobility across regions and sectors. The model implies that limited interprovincial mobility dampened worker reallocation and amplified wage and price pressures, shaping the spatial distribution of real-income gains. Counterfactuals show that spatial labor-market segmentation is an important amplifier of incidence: removing spatial migration frictions reduces cross-province dispersion in nominal wages and real income, while shifting adjustment toward reallocation rather than local wage/price pressure. Moreover, making the export-demand impulse spatially even sharply compresses inflation dispersion, implying that both the geography of the shock and domestic segmentation are first-order for the distribution of gains.
JEL classification: D5, F11, F12, F15, F16, N9, N14, R12, R13
Key words: gains from trade, labor mobility, economic geography
Digital Object Identifier: https://doi.org/10.29338/wp2021-14
For their comments, the author is grateful to Konrad Adler, Treb Allen, Andy Bernard, Emily Blanchard, Toni Braun, Albert Carreras, Thomas Chaney, Kerem Cosar, Klaus Desmet, Chris Edmond, Patrick Feve, Jim Feyrer, Sharat Ganapati, Christian Hellwig, Rob Johnson, Brian Kovak, Tim Lee, Thierry Mayer, Rory McGee, Marti Mestieri, Nina Pavcnik, Franck Portier, B Ravikumar, Vincent Rebeyrol, Juan Rubio-Ramirez, Mohammed Saleh, Chris Snyder, Francois de Soyres, Bob Staiger, Robert Ulbricht, Nikolaus Wolf, as well as seminar and workshop participants in many places. The author would also like to thank Javier Silvestre for sharing his data on internal migration in Spain and Julio Martinez-Galarraga for sharing their data on consumer prices as well as providing helpful comments. Finally, the author acknowledges financial support via ERC grant no. 337272-FiNet. The views expressed here are those of the author and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.
Please address questions regarding content Simon Fuchs, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309.
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