Trade liberalization triggers substantial within-sector labor reallocation, a pattern captured by heterogeneous-firm trade models. We study transition dynamics of firms and workers in response to changes in trade costs, incorporating labor market frictions. Responses vary by firm productivity: high-productivity exporters expand employment, while lower-productivity firms exit, downsize before exit, or gradually shrink. As a result, jobs with similar initial wages differ ex post, with high-productivity firms offering higher wages and greater stability. Calibrating the model, we quantify adjustment channels and show that gains from lower consumer prices outweigh losses from wage cuts, job destruction, and capital losses, although these losses are concentrated among a subset of workers. Downward wage rigidity can improve welfare, creating a trade-off between worker displacement and income loss.

This paper investigates the impact of temporary sectoral shocks on human capital accumulation and introduces a structural model to quantify their long-term general equilibrium effects. I use Spain’s economic boom (1995-2007) as a case study, which represented a positive labor demand shock in construction and low-skill services, and show that it led to a persistent decline in educational attainment among young workers. To evaluate the general equilibrium implications of this shock during the transition, I construct a quantitative lifecycle model in which workers endogenously choose education and sectoral employment under imperfect human capital transferability. The model reproduces the observed decline in educational attainment and sluggish labor reallocation following the boom. The transition, driven primarily by new cohorts, features a persistent decline in aggregate productivity: convergence to the steady state takes 50 years, with an average productivity loss of 0.8\% over the transition. The findings demonstrate that positive sectoral shocks can generate adverse long-run aggregate outcomes and substantial distributional effects— cohorts born during the boom experience lifetime earnings gains of nearly 10%, while those born before or after incur losses—highlighting the scope for redistributive policy interventions.

Trade liberalization and increasing product competition with China from 1990 to 2007 led to significant negative effects on U.S. manufacturing employment and earnings, resulting in the disappearance of a large number of jobs. However, it remains a puzzle why the most affected regions failed to adjust after the shock by creating jobs in other sectors. In this paper, we analyze the long-term effects of the China shock by focusing on its impact on firm entry, employment, and wages in non-tradable sectors. We provide evidence that the shock had a large negative effect on the entry of new firms and on workers’ human capital investment and propose a theory of two-sided labor market frictions to explain these findings. Following the shock, certain industries disappeared in the affected regions, leaving workers unemployed and rendering their accumulated sector-specific skills obsolete. Workers face opportunity costs when investing in new skills, along with high uncertainty about which industries will emerge in the future. At the same time, potential firm entrants face uncertainty regarding the quality of the local labor supply, discouraging them from entering the market. These two-sided frictions create a prolonged transition period before new industries emerge, with the speed of adjustment depending on workers’ costs of investing in human capital and their ability to relocate. This paper provides evidence of both firm-side and worker-side frictions in the labor market and proposes a model that explains the sluggish adjustment of labor markets to trade shocks.