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, which is driven primarily by new cohorts, entails a persistent decline in aggregate productivity, with cumulative losses of about 7% and convergence to the steady state over roughly 50 years. 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 11%, while those born before or after incur losses—highlighting the scope for redistributive policy interventions.

Adjustment to trade liberalization is associated with substantial reallocation of labor across firms within sectors. This salient feature of the data is well captured by models of international trade with heterogeneous firms. In this paper, we reconsider the adjustment of firms and workers to changes in trade costs, explicitly accounting for labor market frictions and the entire adjustment path from an initial to a final steady-state. The transitional dynamics exhibit rich patterns, varying across firms that differ in productivity levels and across workers attached to these firms. High-productivity exporters expand employment on impact. However, among lower-productivity firms some close shop on impact, others fire some workers on impact and close shop at a later date, and still, other firms gradually reduce their labor force and stay in the industry. In these circumstances, jobs that pay similar wages ex-ante are not equally desirable ex-post, because after the trade shock, high-productivity incumbents pay higher wages and provide more job security than low-productivity incumbents. We calibrate the model and provide a quantitative assessment of the importance of various channels of adjustment. We find that gains from trade due to a decline in the consumer price index overwhelm losses from wage cuts, job destruction, and capital losses of incumbent firms, and that these losses increase with the extent of labor market frictions. Furthermore, we find that downward wage rigidity can be welfare-enhancing while generating a trade-off between the workers’ displacement rates and the labor income loss. Decomposition of dynamics gains of trade shows that although firms’ profit is decreasing in the minimum wage as firms are forced to fire more workers on impact, the total gains from trade can increase due to the reduction in labor income loss.

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.