PublicDisclosureAuthorized PublicDisclosureAuthorized PolicyResearchWorkingPaper10434 LaborMarketEffectsofGlobalSupplyChainDisruptions MauricioUlateJoseP.VasquezRomanD.Zarate DevelopmentEconomicsDevelopmentResearchGroupMay2023 PolicyResearchWorkingPaper10434 Abstract ThispaperexaminesthelabormarketconsequencesofrecentglobalsupplychaindisruptionsinducedbyCOVID-19.Specifically,itconsidersatemporaryincreaseininterna-tionaltradecostssimilartotheoneobservedduringthepandemicandanalyzesitseffectsonlabormarketoutcomesusingaquantitativetrademodelwithdownwardnominalwagerigidities.Evenomittinganyhealth-relatedimpactsofthepandemic,theincreaseintradecostsleadstoatempo-rarybutprolongeddeclineinU.S.laborforceparticipation.However,thereisatemporaryincreaseinmanufacturing employmentastheUnitedStatesisanetimporterofman-ufacturedgoods,whichbecomecostliertoobtainfromabroad.Bycontrast,serviceandagriculturalemploymentexperiencetemporarydeclines.Nominalfrictionsleadtotemporaryunemploymentwhentheshockdissipates,butthisdependsonthedegreeofmonetaryaccommodation.Overall,theshockresultsina0.14percentwelfarelossfortheUnitedStates.Theimpactonlaborforceparticipationandwelfareacrosscountriesvariesdependingontheinitialdegreeofopennessandsectoraldeficits. ThispaperisaproductoftheDevelopmentResearchGroup,DevelopmentEconomics.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebathttp://www.worldbank.org/prwp.Theauthorsmaybecontactedatrzaratevasquez@worldbank.org. ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent. ProducedbytheResearchSupportTeam LaborMarketEffectsofGlobalSupplyChainDisruptions*MauricioUlateJoseP.VasquezRomanD.Zarate JELcodes:F10,F11,F16,F40,F66. Keywords:SupplyChainDisruptions,TradeCosts,DownwardNominalWageRigidity. *MauricioUlate:FederalReserveBankofSanFrancisco,JoseP.Vasquez:LSEandCEPR,RomanZarate:DevelopmentResearchGroup,TheWorldBank.WethankMarcoBadilla,LorenzoCaliendo,JuanmaCastro-Vincenzi,IsabelaManelici,JoanMonras,IshanNath,AndresRodriguez-Clare,NicholasSanderandthewholedepartmentattheFRBSFfortheirhelpandusefulcomments.Anyopinionsandconclusionsex-pressedhereinarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsoftheFederalReserveBankofSanFrancisco,theFederalReserveSystem,ortheWorldBank. 1Introduction Inthepastfewyears,COVID-19causedanumberofdisruptionsinglobalsupplychains.Thepandemicstrainedtradeflowsduetoportclosures,reducedshippingcapac-ityowingtolockdowns(forexample,inChina),fewershippingworkersbeingavailableforhealth-relatedreasons,andashortageofshippingcontainers,amongotherchallenges.Thesedisruptions,inturn,causedanincreaseinthecostsofinternationaltrade,poten-tiallyleadingtosubstantialeffectsonproduction,prices,andlabormarkets,aswellasreallocationwithinandacrosscountries. Thispaperquantitativelystudiesthelabormarketconsequencesoftheincreasedin-ternationaltradecostsoriginatingfromtherecentglobalsupplychaindisruptionsinducedbyCOVID-19.Specifically,weanalyzeanx%increaseintheicebergtradecostsofsend-ingproductsacrosscountriesthatrevertsafterτyears.Inourbaselineexercise,westudya12%shockthatrevertsafterthreeyears,whichapproximatesthesizeanddurationofthetradecostsshockduringtheCOVID-19pandemic.However,wealsoexaminehowtheeffectsoftheshockdependonitssize(i.e.,x=6%,18%,or24%)orpersistence(i.e., τ=2,4,5,or6). WeemploythequantitativetrademodeldevelopedbyRodriguez-Clare,Ulate,andVasquez(2022,henceforthRUV)butwithafocusonanalyzingtheeffectsofatrade-costshock.Themodelfeaturesmultiplesectorslinkedbyaninput-outputstructure,sector-leveltradethatsatisfiesthegravityequation,downwardnominalwagerigidity(hence-forthDNWR),andahome-productionsectorthatleadstoanupwardslopinglaborsupplycurve.Tradetakesplacebetweenregions,andworkerscanmoveacrosssectorsinagivenregionsubjecttomobilitycosts.Eachperiod,workersdrawidiosyncraticshockstotheutilityofworkingineachsector.Basedonthesedraws,thecostsofswitchingsectors,andexpectedfuturerealincomeadjustedforunemployment,workerschoosethesectortoparticipate.1 WecaptureDNWRasinSchmitt-GroheandUribe(2016).Thisimpliesthatthenom- 1Ourbaselinemodeldoesnotfeaturemovementbetweenregionsinagivencountry,butoneofourexten-sionsincorporatesthisfeature.Theconsequencesofallowingmigrationacrossregionsareverysmall. inalwageinanyperiodmustbenolessthanafactorδtimesthenominalwageinthepreviousperiodandthatinvoluntaryunemploymentariseswhenwagesareconstrainedbythislowerbound.