Trade, Human Capital, and Income Risk,

Abstract In this paper, we study the causal relationship between trade exposure and individual income risk, with emphasis on the role of human capital. We use a rich worker-level longitudinal dataset from Germany spanning the period 1976-2012, and find industry trade exposure to be causally related to income risk: Imports increase risk and exports decrease risk in an economically significant manner. Importantly, there is a complex interplay between human capital and the linkage between trade and risk: On average, individuals with higher levels of industry- or occupation-specific human capital experience lower risk. However, an increase in industry net imports increases risk more for workers with higher levels of industry tenure. Although net imports are also associated with declines in the mean income of these workers, the estimated effect on income levels is economically small. Our welfare framework, which jointly considers both mean income and income risk, shows that the welfare consequences of trade exposure are quantitatively dominated by the risk channel.