Supply Chain Disruptions, Trade Costs, and Labor Markets
Global supply chain disruptions due to the COVID-19 pandemic have increased the costs of trade between countries. Given the interconnectedness of the U.S. economy with the rest of the world, higher trade costs can have important impacts on U.S. labor markets. A model of the U.S. economy that incorporates variation in industry concentrations across regions can help quantify these effects. The analysis suggests that recent global supply disruptions could cause a sizable and persistent reduction in labor force participation.
The U.S. economy has become increasingly integrated with the rest of the world over the past four decades. Trade with other countries is broader and plays a greater role in the overall performance of the economy, with a commensurate impact on the type and availability of jobs. In this context, disruptions to the flow of products between countries can affect the U.S. labor market in significant ways, impacting labor force participation, unemployment, and the distribution of jobs across industries.
Given this increase in trade reliance, U.S. labor markets have been highly exposed to global supply chain disruptions induced by the COVID-19 pandemic. The pandemic strained international trade due to ports being closed or operating at partial capacity, fewer workers being available for health reasons, and a shortage of shipping containers, among other challenges. In this Economic Letter, we analyze the implications of such global supply chain disruptions for U.S. labor markets by studying the effects of increased transportation costs in a model of the U.S. economy that incorporates variation in industry concentration across regions. Our analysis finds that these challenges could have large effects on U.S. labor force participation for several years, even as global supply chain disruptions ease.
