The Rise of the East and the Far East: German Labor Markets and Trade Integration

Abstract

We analyze effects of unprecedented rise in trade between Germany and the East – China and Eastern Europe – in period 1988-2008 on German local labor markets. Using detailed administrative data, we exploit cross-regional variation in initial industry structures and use trade flows of other high-income countries as instruments for regional import and export exposure. We find that rise of the East in world economy caused substantial job losses in German regions specialized in import-competing industries, both in manufacturing and beyond. Regions specialized in export-oriented industries, however, experienced even stronger employment gains and lower unemployment. In aggregate, we estimate that this trade integration has caused some 493,000 additional jobs in economy and contributed to retaining manufacturing sector in Germany. We also conduct our analysis at individual worker level, and find that trade had a stabilizing overall effect on employment relationships.