Labor market effects of global supply chain disruptions

Abstract

We examine the labor market consequences of global supply chain disruptions. Specifically, we consider a temporary increase in international trade costs similar to the one observed during the COVID-19 pandemic and analyze its effects on labor market outcomes using a quantitative trade model with downward nominal wage rigidities. The increase in trade costs leads to a temporary but prolonged decline in U.S. labor force participation. However, there is a temporary increase in manufacturing employment as the United States is a net importer of manufactured goods, which become costlier to obtain from abroad. By contrast, service and agricultural employment experience temporary declines. Nominal frictions lead to temporary unemployment when the shock dissipates, but this depends on the degree of monetary accommodation. Overall, the shock results in an 8.5 basis points welfare loss for the United States. The impact on labor force participation and welfare across countries varies depending on the initial degree of openness and sectoral deficits.