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Title: Trade Costs and Economic Geography: Evidence from the U.S.

Citation Type: Miscellaneous

Publication Year: 2018

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Abstract: The role of trade costs in generating the spatial distribution of wages and em- ployment across regions is a classic question in economic geography. In this paper I make several contributions to the extensive theoretical and empirical literature on this question. First, building on the recent literature I show that for a wide class of economic geography models the positive implications of changes in trade costs are entirely captured by two reduced form elasticities: the elasticities of wages and employment with respect to market access. Second, I develop a novel instrumen- tal variable approach to consistently estimating these elasticities from changes in observed wages and employment using exogenous changes in the incomes of each location’s trading partners. I implement this approach using data on U.S. MSAs be- tween 1990 and 2007 and find that wages and employment are quite sensitive to differences in market access due to trade costs. Counterfactual simulations indi- cate that eliminating trade costs would result in large shifts in employment from the Northeast towards the South and West and a flattening of the city size distribution. More modest reductions in trade costs result in qualitatively similar outcomes that remain quantitatively large.

Url: https://drive.google.com/open?id=1yxjszpuabtp--Pe_SS_mkgxgjKkR0lp-

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Authors: Bartelme, Dominick

Publisher: UC Berkeley

Data Collections: IPUMS USA

Topics: Other

Countries: United States