Working Paper 2021-14
Abstract: How does intranational factor mobility shape the welfare effects of a trade shock? I provide evidence that during WWI, a demand shock emanated from belligerent countries and affected neutral Spain. Within Spain, labor predominantly reallocated locally, while the most affected provinces experienced drastic increases in wages and consumer prices. Embedding imperfect labor mobility in an economic geography model, I show that external demand shocks can improve allocative efficiency, but asymmetric shocks cause localized increases in wages and consumer prices instead of reallocation. Adjusting an aggregate gains of trade formula to take domestic reallocation into account more than triples the estimated welfare effects.
JEL classification: D5, F11, F12, F15, F16, N9, N14, R12, R13
Key words: gains from trade, labor mobility, economic geography
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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