The Causal Impact of Trade Integration on Individual Workers: Job Stability, Earnings, and Geographical Labor Mobility

The objective of this project is to investigate how individual workers in Germany adjust to trade shocks, more specifically, to the rise of China and Eastern Europe in the world economy. Drawing on methodology recently developed in labor economics and international trade, we measure the import and the export exposure of the sector in which a particular worker is employed. We then relate this sectoral exposure to different individual labor market outcomes. To tease out the causal effect of trade, we use an instrumental variable technique where third-country trade flows are considered as instruments for import exposure across German industries.

Our specific focuses are three different, interrelated adjustment mechanisms where we have identified gaps in the existing literature, and the need for further research: 1) Employment and job stability, 2) Wages and wage inequality, and 3) geographical labor mobility.
On the first aspect, previous research has shown that average expected employment durations tend to be higher in sectors with higher export exposure. This can be compatible with recent theories of international trade if the aggregate increase in job duration is driven by an expansion of productive exporting firms which, in turn, leads to a stabilization of employment relationships for their incumbent workers. To investigate this hypothesis, we aim to carefully analyze for which worker-establishment pairs expected job durations are positively affected by trade exposure. Specifically, do employment durations react more positively to trade shocks in such establishments that were traditional exporters, or in such establishments that switch to become exporters?

On the second aspect, our main aim is to provide a detailed analysis how trade shocks affect wages in Germany, differentiated by the type of establishment the respective individual is affiliated with. After estimating the causal effect of the rise of “the East” on individual wages, we provide a detailed comparison with previous results that attribute most of the observed increase in wage inequality in Germany to skill-biased technological change. Moreover, we set our results into perspective to the recent literature on job polarization and task offshoring. The key challenge is to investigate if trade or technology is the main driver of wage inequality in Germany.

Finally, on the third aspect, we investigate if trade shocks induce individual mobility responses, and what the effects of those responses are. To do so, we first develop a theoretical framework where industries are hit by exogenous trade shocks, and where workers faced with those shocks can respond with geographical labor mobility. Local housing prices adjust to these induced waves of labor mobility, and hence the trade shocks are endogenously “capitalized” in those prices. Using German labor market and newly collected housing price data, we then apply this framework in order to understand along which margins individuals mainly adjust to trade shocks.

Prof. Dr. Wolfgang Dauth (University of Wuerzburg and IAB)
Prof. Sebastian Findeisen, PhD (University of Konstanz)
Prof. Dr. Jens Südekum (Heinrich-Heine-University Duesseldorf)

Linda Borrs (Universität Bamberg)
Florian Knauth (Heinrich-Heine-University Duesseldorf)
Niko Steffen (Heinrich-Heine-University Duesseldorf)

Enrico Moretti (University of California, Berkeley)
Jens Wrona (University Duisburg-Essen)
Erwin Winkler (University of Erlangen-Nürnberg)