This paper analyzes to what extent labor market frictions limit the gains from market integration. I use an external demand shock to the Spanish economy as a natural experiment to identify and quantify the effect of labor mobility costs on Spain's development. Using newly digitized trade and labor market data, I show that during WWI (1914-1918) a large, temporary and sectorally heterogeneous demand shock emanated from belligerent countries, as a result of which Spain expanded its manufacturing employment and exports, while income growth between the north and south in Spain diverged. To quantify and analyse the role of mobility costs I build and estimate a multi-sector economic geography model that allows for sectoral and spatial mobility costs. Spatial mobility costs dominated with an estimated 80% of reallocation of labor taking place within rather than between provinces. I use the estimated model to calculate counterfactuals to examine the effects of and interaction between output and input market integration: Comparing to the non-shock counterfactual I find that the WWI-shock increased manufacturing employment by 10%, and induced highly uneven spatial development with the north growing 27% faster. The shock constituted a 6% increase in market size and increased aggregate real incomes by 20%. Lowering mobility costs by 10% increases real income gains from the WWI-shock by an additional 3%, and exceeds gains in the non-shock scenario, suggesting that labor market integration and output market integration are complements.
We document two stylized facts for the international movie market. Firstly, that the share of revenue of sequels and adapted - non-original - content has increased dramatically over the last two decades, and that furthermore the global market has become geographically more diverse. We propose that this situation can be explained by considering a setting where firms face a global market where countries have horizontally differentiated taste, yet the firm has to release one global good for all markets. In this setting the firm needs to decide on the profit maximising location in the taste space that is populated by the consumers of the individual countries. If furthermore the firm faces production uncertainty, that affect the realized position of the product in the taste space, then there is a mean-variance trade-off between goods that provide more uncertainty but a better expected position, versus goods that are safer but have a worse expected position. In this setting the rise of the East Asian market has changed the taste diversity that the firms are facing, and sequels provide a safer option to hedge against this spatial risk. We propose a way of estimating this model and the production uncertainty based on a random utility framework.
Cities and regions face a trade-off: they can specialize in individual sectors and benefit from associated scale economies, but at the same time such specialization increases labor market risk due to sector specific shocks. In the presence of mobility costs across regions and sectors, workers employment risk will have a strong geographical component. We document the extent to which less diversified cities experience higher sustained unemployment and demonstrate a persistent spatial variance in unemployment rate after the great recession in France. Finally, we posit an economic geography model with a general geography, imperfect labor mobility, multiple sectors, and general agglomeration economies, as well as unemployment to show how such a model incorporates the scale-diversity trade off and can thereby replicate the spatial variance of unemployment seen in the data.
In a large class of firm level trade models export performance depends on firm-level productivity and origin-destination(-sector) specific trade costs, implying that provinces with a comparative advantage in a given sector, should perform uniformly better across all destinations, unless differences in intra-national trade costs are large. I document that the observed heterogeneity in trade performances of French exporting firms within narrow sectors across destinations violates this finding. At the same time I present micro-level evidence from French matched employee-employer data that shows that workers in the marketing occupation of a company with prior work exposure to destination specific exports obtain very different premia across France, indicating differences in the supply and demand for this form of human capital. I combine both stylized facts in a model where firms need to employ knowledgeable workers to penetrate markets, and where workers first learn about destination markets on the job, then distribute that knowledge by moving across provinces and between firms. However, imperfect labor mobility limits this knowledge dissipation. I demonstrate how this model can generate endogenously - through the learning effect combined with limited knowledge dissipation - destination specific comparative advantage across regions. Fitting the model to the data, I conduct counterfactual analyses where mobility is subsidised in order to benefit from improved knowledge dissipation.