Title: On how firms adjust when trade stops: Labor market, industrial linkages, and macroeconomic effects
Authors: Aurelija Proskute - Bank of Lithuania (Lithuania)
Povilas Lastauskas - CEFER Vilnius University (Lithuania) [presenting]
Alminas Zaldokas - Hong Kong University of Science and Technology (Hong Kong)
Abstract: The aim is to investigate how firms adjust to sudden and unanticipated negative trade shock coming from the sanctions completely banning exports to one of their major trade partners. We explore a unique event, Russia banning imports of agricultural and food products from the European Union in 2014, when due to political reasons, unrelated to trade, the exporters in a small open economy have lost access to a major export market. The negative trade shock that we explore allows us to quantify the firm adjustment margins at the micro level and their propagation into the macro economy via the input-output network structure and the implied linkages among the firms. Abstracting away from a number of other adjustment margins or employment options, we instead assume empirically relevant ingredients: full- and part-time work, worker heterogeneity, lower employment costs. We find that firms have primarily adjusted by reducing their full-time employment by shifting to the part-time employment, both in terms of the number of people and the hours worked. However, the average wage per hour (or per employee) has not decreased (rather, the opposite), thus indicating that the remaining employees had the same (or higher) productivity. This suggests that trade policies have an immediate effect on labor market and that recent global trends reversing trade integration might have adverse consequences on labor markets in the export-dependent industries.