This paper examines the impact of a pandemic in a developing economy. Measured by excess deaths relative to the historical trend, the 1918 influenza in Spain was one of the most intense in Western Europe. However, aggregate output and consumption were only mildly a↵ected. In this paper we assess the impact of the flu by exploiting within-country variation in "excess deaths" and we focus on the returns to factors of production. Our main result is that the e↵ect of flu-related "excess deaths" on real wages is large, negative, and shortlived. The e↵ects are heterogeneous across occupations, from null to a 15 per cent decline, concentrated in 1918. The negative e↵ects are exacerbated in more urbanized provinces. In addition, we do not find e↵ects of the flu on the returns to capital. Indeed, neither dividends nor real estate prices (houses and land) were negatively a↵ected by flu-related increases in mortality. Our interpretation is that the Spanish Flu represented a negative demand shock that was mostly absorbed by workers, especially in more urbanized regions.
We develop a model for analyzing the distributional effects of two globalizations and their interdependence. We distinguish between two trade cost reductions, (i) trade liberalizations in the 1980s, which increased trade in low-skill-intensive goods (denoted L-Globalization) and (ii) reductions in communication costs due to the IT revolution, which raised trade in middle-skill-intensive goods during the 1990s (denoted C-Globalization). We consider a North-South trade economy in which the North is skill abundant. A freely traded final good is produced using high-skill services and a bundle of inputs. Inputs differ on the intensity of middle-and low-skill workers required to be produced, and are subject to heterogeneous trade costs. In the North, we find that wage inequality increases in the L-globalization. During the C-globalization, wage polarization emerges. The relative wage of high-to middle-skill workers increases, while the relative wage of middle-to low-skill workers is hump-shaped. We find a complementarity between the two globalizations. Wage polarization is delayed by the extent of trade in the L-globalization. In the South, we find that wage inequality increases in both globalizations. Finally, we show how asymmetric participation in the C-globalization of two southern countries generates a discontinuous pattern of specialization. The southern country participating in the C-globalization specializes in the least and most skill-intensive traded inputs.
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