The unequal effects of trade and automation across local labor markets

We quantify the joint impact of the China shock and automation of labor, across US commuting zones (CZs) in the period 2000–2007. To this end, we employ a multi-sector gravity model of trade with Roy-Fréchet worker heterogeneity across sectors, where labor input can be automated. Automation and increased import competition from China are both sector-specific; they lead to contractions in a sector’s labor demand and a decline in relative income for CZs more specialized in that sector, amplified by a voluntary reduction in hours worked and an increase in frictional unemployment. The estimated model fits well with the aggregate performance of manufacturing subsectors and with the variation across CZs in changes in average income, the hourly wage, hours worked, the employment rate and employment in manufacturing. By itself, the China shock has stronger distributional effects than automation, but its impact on aggregate gains is less than a third of automation’s impact.