Job Market Paper
Sectoral Shocks and Labor Market Dynamics: A Sufficient Statistics Approach (with Ryungha Oh)
In this paper, we develop a sufficient statistics approach to evaluate the impact of sectoral shocks on labor market dynamics and welfare. Within a broad class of dynamic discrete choice models that allows for arbitrary persistent heterogeneity across workers, we show that knowledge of steady-state sectoral worker flows over different time horizons is sufficient to evaluate the labor supply responses to shocks as well as their aggregate welfare consequences. We also establish analytically that assuming away persistent worker heterogeneity, a common practice in the existing literature, necessarily leads to overestimation of steady-state worker flows, resulting in systematic biases in counterfactual predictions. As an illustration of our sufficient statistics approach, we revisit the consequences of the rise of import competition from China. Using US panel data to measure steady-state worker flows, we conclude that labor reallocation away from manufacturing is significantly slower, and the negative welfare effects on manufacturing workers are much more severe than those predicted by earlier models without persistent worker heterogeneity.