Regional Industrial Diversity and Trade-Induced Worker Adjustments: Evidence from France

The growing popularity of protectionist policies across Western Europe and in the U.S. has brought renewed attention to the unequal gains from globalization, especially the plight of trade-displaced workers and towns facing external developments such as globalization and automation. We introduce a new framework to evaluate the effects of regional industrial diversification on the adjustment workers and towns exposed to adverse trade shocks. In the presence of mobility frictions, there is a trade-off between local industrial specialization and local diversification: regions can specialize in their comparative advantage industries, but at the same time, such lack of diversification can increase the labor market risks faced by its workers. If mobility costs are high, then welfare effects from lack of diversification can be substantial. We develop a new spatial equilibrium model that incorporates labor market frictions, unemployment, and mobility costs into an otherwise standard multi-sector economic geography model. We use a unique confidential administrative data linking workers and firms in France to investigate the role of local industrial diversification in labor market responses to trade shocks. We use the model to estimate mobility frictions and matching frictions faced by workers across local labor markets in France. These findings can inform the response of French cities and workers to automation, technological changes, and globalization.