Selected Annotated Bibliography – John McLaren.


(1) “Looking for Local Labor-Market Effects of NAFTA” (with Shushanik Hakobyan). Review of Economics and Statistics, 98:4, October 2016.


Using US Census data for 1990-2000, we estimate effects of NAFTA on US wages. We look for effects of the agreement by industry and by geography, measuring each industry’s vulnerability to Mexican imports, and each locality’s dependance on vulnerable industries. We find evidence of both effects, dramati- cally lowering wage growth for blue-collar workers in the most affected industries and localities (even for service-sector workers in affected localities, whose jobs do not compete with imports). These distributional effects are much larger than aggregate welfare effects estimated by other authors.



(2) “Are Immigrants a Shot in the Arm for the Local Economy?” (with Gihoon Hong). National Bureau of Economic Research #21123 (April 2015).


Most research on the effects of immigration focuses on the effects of immigrants as adding to the supply of labor. This paper studies the effects of immigrants on local labor demand, due to the increase in consumer demand for local services created by immigrants. This effect can attenuate downward pressure from immigrants on non-immigrants’ wages, and also benefit non-immigrants by increasing the variety of local services available. For this reason, immigrants can raise native workers’ real wages, and each immigrant could create more than one job. Using US Census data from 1980 to 2000, we find considerable evidence for these effects: Each immigrant creates 1.2 local jobs for local workers, most of them going to native workers, and 62% of these jobs are in non-traded services. Immigrants appear to raise local non-tradables sector wages and to attract native-born workers from elsewhere in the country. Overall, it appears that local workers benefit from the arrival of more immigrants.



(3) “Trade policy and wage inequality: A structural analysis with occupational and sectoral mobility” (with Erhan Artuç). Journal of International Economics 97 (2015), pp. 278–294


A number of authors have argued that a worker's occupation of employment is at least as important as the worker's industry of employment in determining whether the worker will be hurt or helped by international trade. We investigate the role of occupational mobility on the effects of trade shocks on wage inequality in a dynamic, structural econometric model of worker adjustment. Each worker in our specification can switch either industry, occupation, or both, paying a time-varying cost to do so in a rational-expectations optimizing environment. We also specify a novel model of offshoring based on task-by-task comparative advantage that collapses to a very simple form for simulation. We find that the costs of switching industry and occupation are both high, and of similar magnitude. In simulations we find that a worker's industry of employment is much more important than either the worker's occupation or skill class in determining whether or not she is harmed by a trade shock, but occupation is crucial in determining who is harmed by an offshoring shock.



(4) “When is it optimal to delegate: The theory of fast-track authority.” (with Levent Celik and Bilgehan Karabay). American Economic Journals: Microeconomics, August 2015.


With fast-track authority (FTA), the US Congress delegates trade- policy authority to the President by committing not to amend a trade agreement. Why would it cede such power? We suggest an interpretation in which Congress uses FTA to forestall destructive competition between its members for protectionist rents. In our model: (i) FTA is never granted if an industry operates in the majority of districts; (ii) The more symmetric the industrial pat- tern, the more likely is FTA, since competition for protectionist rents is most punishing when bargaining power is symmetrically distributed; (iii) Widely disparate initial tariffs prevent free trade even with FTA.



(5) “Trade Policy Making in a Model of Legislative Bargaining.” With Levent Çelik and Bilgehan Karabay. Journal of International Economics 91:2 (November 2013), pp. 179-90.


We examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the ‘invisible handshake’) in a labor market with search frictions. Employers promise as much wage-smoothing as they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments.



(6) “Media Mergers and Media Bias with Rational Consumers.” Journal of the European Economic Association 10:4, August 2012. (Joint with Simon Anderson.)


We present an economic model of media bias and media mergers. Media owners have political motives as well as profit motives, and can influence public opinion by withholding information that is pejorative to their political agenda – provided that their agenda is not too far out of the political mainstream. This is true even with rational consumers who understand the media owners’ biases, because the public do not know how much information the news organizations have and so do not know when news is being withheld. This problem can be undone by competition; but competition can be defeated in equilibrium by media mergers that enhance profits at the expense of the public interest. We thus derive a motive for media merger policy that is completely distinct from the motives behind conventional antitrust.



(7) “Pareto-improving firing costs?” European Economic Review, 55:8, December 2011, pp. 1083-1093. (Joint with Bilgehan Karabay).


We examine self-enforcing contracts between risk-averse workers and risk-neutral firms (the ‘invisible handshake’) in a labor market with search frictions. Employers promise as much wage-smoothing as they can, consistent with incentive conditions that ensure they will not renege during low-profitability times. Equilibrium is inefficient if these incentive constraints bind, with risky wages for workers and a risk premium that employers must pay. Mandatory firing costs can help, by making it easier for employers to promise credibly not to cut wages in low-profitability periods. We show that firing costs are more likely to be Pareto-improving if they are not severance payments.



(8) “Trade, Offshoring, and the Invisible Handshake” (joint with Bilgehan Karabay). Journal of International Economics 82:1, 2010, pp. 26-34.


We study the effect of globalization on the volatility of wages and worker welfare in a model in which risk is allocated through long-run employment relationships (the ‘invisible handshake’). Globalization can take two forms: international integration of commodity markets (i.e., free trade) and international integration of factor markets (i.e., offshoring). In a two-country, two-good, two-factor model we show that free trade and offshoring have opposite effects on rich-country workers. Free trade hurts rich-country workers, while reducing the volatility of their wages; by contrast, offshoring benefits them, while raising the volatility of their wages. We thus formalize, but also sharply circumscribe, a common critique of globalization.



(9) “Trade Shocks and Labor Adjustment: A Structural Empirical Approach.” American Economic Review 100:3 (June 2010), pp. 1008-45. (Joint with Erhan Artuç and Shubham Chaudhuri.) (Reprinted in Key Concepts in the New Global Economy, edited by David A. Baldwin, published by Edward Elgar, and in The International Library of Critical Writings in Economics: Trade And Inequality (2015), Pinelopi Goldberg (ed.), Edward Elgar.))


The welfare effects of trade shocks turn on the nature and magnitude of the costs workers face in moving between sectors. Using an Euler-type equilibrium condition derived from a rational expectations model of dynamic labor adjustment, we estimate the mean and variance of workers' switching costs from the U.S. CPS. We estimate high values of both parameters, implying slow adjustment of the economy, and sharp movements in wages, in response to trade shocks. However, import competing workers can still benefit from tariff removal; liberalization lowers their wages in the short and long run, but raises their option value.



(10) “A Theory of Insidious Regionalism.” The Quarterly Journal of Economics, Vol. 117, No. 2 (May, 2002), pp. 571-608.


This paper presents an interpretation of rising regionalism in world trade as a coordination failure, based on (i) sector-specific sunk costs in production, and (ii) “friction” in trade negotiation. Given these elements, if a regional trade bloc is expected to form, private agents will make investments that will make bloc member countries more specialized toward each other, but bloc and nonbloc countries mutually less specialized. This diminishes the ex post demand for multilateral free trade. Thus, the expected supply of regionalism generates its own demand, creating a Pareto-inferior equilibrium.



(11) “‘Globalization’ and Vertical Structure.” American Economic Review 90:5 (December 2000), pp. 1239-54. Reprinted in Global Supply Chain Management (2006), Masaaki Kotabe and Michael J. Mol (ed.), Edward Elgar.


This paper analyzes the effects of international openness on vertical integration. Vertical integration can confer a negative externality, by thinning the market for inputs and thus worsening opportunism problems; this induces strategic complementarity and multiple equilibria in the integration decision, thus providing a theory of different “industrial systems” or “industrial cultures” in ex ante identical countries. International openness thickens the market, facilitating leaner, less integrated firms, thus providing gains from international openness quite different from those that are familiar from trade theory. This may be taken as one theory of “outsourcing,” “downsizing,” and “Japanization” as consequences of “globalization.”



(12) “Supplier relations and the market context: A theory of handshakes.” Journal of International Economics 48 (1999), pp. 121-38.


This paper analyzes the degree of formality in industrial procurement. Contracts impose cost discipline on suppliers, but stifle cooperative innovation; non-contractual procurement provides cooperation but poor cost discipline. However, cost discipline comes naturally when there is not much vertical integration, because the promise of finding an alternative buyer to use as a bargaining threat enhances the supplier’s incentive to make efficiency-enhancing investments. Thus, highly integrated industries use contracts, while less integrated industries do business on handshakes. In the latter, cooperative innovations flourish. This may help explain some international comparisons and changes in business practices observed over time.