Research Seminar - Matti Sarvimäki (Aalto University)  - Exposure(s) to Trade and Earnings Dynamics: Evidence from the Collapse of Finnish-Soviet Trade

Co-author: Arnaud Costinot (MIT) and Jonathan Vogel (UCLA)


How do local labor markets shape the response to trade shocks? Do workers whose employers are more exposed to negative trade shocks fare equally poorly across markets or is there something distinct about their experience in the most negatively affected markets? To make progress on these questions, we study the impact of a massive trade shock—the collapse of the Finnish-Soviet bilateral trade agreement—on the earnings trajectories of Finnish workers. Combining newly-digitized data on Finnish firms’ licensed exports to the USSR with matched employer-employee data, we construct measures of both worker and market exposure to the USSR shock. We find that more exposed workers within a labor market experience systematically lower earnings after the shock and that the negative effect of worker exposure is persistently larger in more exposed markets, a form of local scarring. We develop a simple model of labor market dynamics with wage rigidity that rationalizes the previous empirical results and generates new theoretical predictions about the dynamic response of employment and wages, all broadly consistent with the Finnish experience.

To view the paper, click here.


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