The Spoils of War: Trade Shocks & Labor Mobility in Spain during WWI

This paper analyzes to what extent labor market frictions limit the gains from market integration. I use an external demand shock to the Spanish economy as a natural experiment to identify and quantify the effect of labor mobility costs on Spain’s development. Using newly digitized trade and labor market data, I show that during WWI (1914-1918) a large, temporary and sectorally heterogeneous demand shock emanated from belligerent countries, as a result of which Spain expanded its manufacturing employment and exports, while income growth between the north and south in Spain diverged. To quantify and analyse the role of mobility costs I build and estimate a multi-sector economic geography model that allows for sectoral and spatial mobility costs. Spatial mobility costs dominated with an estimated 80% of reallocation of labor taking place within rather than between provinces. I use the estimated model to calculate counterfactuals to examine the effects of and interaction between output and input market integration: Comparing to the non-shock counterfactual I find that the WWI-shock increased manufacturing employment by 10%, and induced highly uneven spatial development with the north growing 27% faster. The shock constituted a 6% increase in market size and increased aggregate real incomes by 20%. Lowering mobility costs by 10% increases real income gains from the WWI-shock by an additional 3%, and exceeds gains in the non-shock scenario, suggesting that labor market integration and output market integration are complements. ∗I am indebted to my advisor Thomas Chaney for his invaluable guidance. For crucial help and advice, I also want to thank Treb Allen, Nina Pavcnik and the research community at Dartmouth College much of the paper was written while visiting the college. For their comments, I am grateful to Konrad Adler, Andy Bernard, Emily Blanchard, Klaus Desmet, Chris Edmond, Patrick Feve, Jim Feyrer, Sharat Ganapati, Christian Hellwig, Rob Johnson, Tim Lee, Thierry Mayer, Rory McGee, Marti Mestieri, Franck Portier, Vincent Rebeyrol, Mohammed Saleh, Chris Snyder, Francois de Soyres, Bob Staiger, Robert Ulbricht, Nikolaus Wolf as well as seminar participants at Dartmouth College, the ENTER Jamboree at UCL, the Interwar Economic history workshop at LSE, the joint TSE-Melbourne University workshop and the Macro and Applied Micro Workshop at TSE. In particular I want to thank Javier Silvestre for sharing his data on internal migration in Spain at the beginning of the 20th century, the administrative staff at Biblioteca Nacional de Catalunya for aiding me to find the right documents, and Begoña Alarcón for helping me translate and digitze historical Spanish records. Finally, I acknowledge financial support via ERC grant No 337272-FiNet. All remaining errors are my own.