https://macropaperwarehouse.com/authors/andres-rodriguez-clare/Andrés Rodríguez-ClareHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/trade-with-nominal-rigidities-understanding-the-unemployment-and-welfare-effects-of-the-china-shock/https://macropaperwarehouse.com/papers/trade-with-nominal-rigidities-understanding-the-unemployment-and-welfare-effects-of-the-china-shock/<p>Standard international trade models assume perfectly flexible prices and full employment. This paper introduces nominal rigidities (downward wage rigidity) into a quantitative trade model and asks how this changes the welfare gains from trade liberalization. The central finding is that standard flexible-price estimates overstate the welfare gains by approximately one-third: trade liberalization can generate unemployment in import-competing sectors when wages cannot fall, and the forgone output from these workers is a welfare cost that flexible-price models miss entirely. The paper calibrates the degree of downward wage rigidity to cross-country data on unemployment volatility and shows that the magnitude of the overstatement is robust across a range of calibrations. An analytical decomposition separates the allocative efficiency gains (which standard models capture) from the employment losses (which they miss), clarifying when the overstatement is large versus small.</p>