Can labor market institutions mitigate the China syndrome? Evidence from regional labor markets in Western Europe

Advanced economies around the world experience a surge of anti-globalization movements. The question is whether these protests are justified and what governments can do to cushion potential adverse trade shocks. The focus is... [ view full abstract ]

Advanced economies around the world experience a surge of anti-globalization movements. The question is whether these protests are justified and what governments can do to cushion potential adverse trade shocks. The focus is set on the rise of China in the global economy since the end of the last century and how its surge affects various sectors in European regional labor markets in terms of employment shares. Particular attention is paid to the design of different labor market institutions, and whether they alleviate or amplify the import shock. Empirical evidence from sectorally disaggregated data suggests that stronger import exposure per worker reduces the employment share of the manufacturing sector. This shock is absorbed by the construction sector, while the services sector is largely unaffected. Overall, higher labor market rigidity tends to protect jobs in the traditional sectors, but does not mitigate the adverse effect on manufacturing. The analysis of individual-level data indicates a higher probability for sectoral transition and a lower probability for changing region of residence due to import competition. Regional labor market rigidity reduces the probabilities of both events, but a mitigating effect is also absent.