Industry Mix, Local Labor Markets, and the Incidence of Trade Shocks

Abstract

We analyze the roles that skill transferability and the local industry mix have on the adjustment costs of workers a ff ected by a negative trade shock. Using rich administrative data from Germany, we construct novel measures of economic distance between sectors based on the notion of skill transferability. We combine these distance measures with sectoral employment shares in German regions to construct an index of labor market flexibility. This index captures the degree to which workers from a particular industry will be able to reallocate into other jobs. We then study the role of labor market flexibility on the e ff ect of import shocks on the earnings and the employment outcomes of German manufacturing workers. Among workers living in inflexible labor markets, the di ff erence between a worker at the 75th percentile of industry import exposure and one at the 25th percentile of exposure amounts to an earnings loss ranging from 9 to 12% of initial annual income (over a 10 year period). The earning losses of workers living in flexible regions are much smaller (3.5 to 4%). These findings are robust to controlling for a wide array of region level characteristics, including region size and overall employment growth. Taken together, our findings indicate that the industry composition of local labor markets plays an important role on the adjustment processes of workers.