Magnification of the 'China shock' through the US housing market

The 'China shock' operated in part through the housing market, which is one reason why its impact was so large on the U.S. labor market. We add housing to a multi-region multi-sector model, with individuals choosing whether and where to work. Controlling for housing reduces the negative direct impact of import exposure on manufacturing employment by 26%-31%, with a significant magnification through the housing market. A variance decomposition analysis shows that the indirect effect of the China shock through the housing market contributes an added 11% to the variance in manufacturing employment as compared to the direct effect of import exposure. For manufacturing and construction employment combined, the indirect effect even outweighs the direct effect.