- | Monday, January 15
- 12:00 PM
- Kaiserplatz 7-9, 4th floor, Room 4.006
The Spoils of War: Trade Shocks during WWI and Spain’s Regional Development
This paper contributes new evidence on how labor market frictions can inhibit regional economic development and how a foreign demand shock can overcome them. I digitized new historical trade and labormarket data to examine a trade shock to the Spanish Economy due to the participation of Spain’s key trading partners in World War I (1914-18) while Spain remained neutral. I document that WWI induced a large, temporary and sectorally heterogeneous demand shock that originated in belligerent countries, particularly France. Furthermore, provincial income growth exhibited a spatial gradient, decreasing by 4% for each additional 100km distance to Paris. Finally, provinces with a favorable industry composition experienced increased population growth which persisted after the shock had faded. I build and estimate a multi-sector economic geography model that allows for sectoral and spatial labor market frictions as well as external scale economies. Estimated labor market frictions are high and the parameters suggest decreasing returns to be present in some industries, limiting gains from reallocation. The model is used to calculate the unobserved reallocation patterns during the shock. Spatial frictions dominated with an estimated 84% of reallocation of labor taking place within provinces rather than between. Simulating reallocation patterns in the absence of the shock, I find that the shock increased manufacturing employment by 13%, and a spatial growth gradient was induced with the northern provinces growing 27% faster, about half of which the model attributes directly to the War.