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The Impact of “China Trade Shock” on US Workers
This is a pretty good example of a trade-off in economic policymaking. From “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade” by David Autor, David Dorn, and Gordon Hanson (italics mine):
China’s economic growth has lifted hundreds of millions of individuals out of poverty. The resulting positive impacts on the material well-being of Chinese citizens are abundantly evident. Beijing’s seven ring roads, Shanghai’s sparkling skyline, and Guangzhou’s multitude of export factories none of which existed in 1980s are testimony to China’s success. …
If one had to project the impact of China’s momentous economic reform for the U.S. labor market with nothing to go on other than a standard undergraduate international economics textbook, one would predict large movements of workers between U.S. tradable industries (say, from apparel and furniture to pharmaceuticals and jet aircraft), limited reallocation of jobs from tradables to non- tradables, and no net impacts on U.S. aggregate employment.
The reality of adjustment to the China trade shock has been far different. … Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.
The story here: China became a global factory, and its living standards rose. But economic reality in America since 2000 didn’t adjust as quickly as economic models might suggest. Regions got hit hard and then stayed on the mat. Noah Smith: “Workers in these industries and regions don’t go on to better jobs, or even similar jobs in different industries. Instead, they shuffle from low-paid job to low-paid job, never recovering the prosperity they had before Chinese competition hit. Many of them end up on welfare.”
Indeed, these findings were hinted at in another Autor study, in which he wrote of his suspicious that “the deceleration of the U.S. labor market after 2000, and further after 2007” was connected to “the employment dislocations in the U.S. labor market brought about by rapid globalization, particularly the sharp rise of import penetration from China following its accession to the World Trade Organization in 2001.”
Now I don’t think protectionism was or is the answer here — although politicians seems to be talking about it more and more these days. First, as the researchers say, the China trade shock is pretty much at an end: “The country is moving beyond the period of catch-up associated with its market transition and becoming a middle-income nation. Rapidly rising real wages indicate that the end of cheap labor in China is at hand.”
Second, for humanitarian reasons we should want a more prosperous China. And hopefully that prosperity will eventually lead to an increasingly democratic society. Good economic reasons, too, even beyond significant consumer benefits or China being a market for our goods and services. More educated, healthy, technology-enabled humans equals more potential intellectual firepower for invention and innovation that will benefit all.
But government does a have a safety net role to play here. Adam Ozimek offers his thoughts on the study:
… each $1,000 in Chinese imports per U.S. worker increases the cost of government benefits by $57.73. It is worrisome that these costs show up in disability benefits and retirement benefits, suggesting permanent, not temporary, labor market losses. Trade Adjustment Assistance, which is meant to help those who have been harmed by trade, is a smaller cost than disability benefits. These results show that “doing nothing” is not an option, and just letting the existing safety net work is expensive. Instead of pushing workers into retirement, policies that help workers remain employed should be expanded. Those policies include the earned income tax credit and wage subsidies. While this research doesn’t suggest trade should be slowed or stopped, it does tell us that the costs of doing nothing are high, which makes expanding pro-work safety net policies cheaper than we thought.
I would also add something like relocation assistance so workers can more easily move to where the better jobs are.
Published in Culture, Economics
It’s interesting how American workers are essentially treated as lab rats in the globalist’s little experiments.
I gotta say, this is progress. At least we’re finally admitting that this kind of trade actually hurts US workers, and not just temporarily. The standard free trade rah-rah normally doesn’t permit such things to be spoken.
I’ve got to say how the economists, which expertise I am totally unqualified to claim, see this as an equation. There are people involved. How do you address that?
“Second, for humanitarian reasons we should want a more prosperous China. And hopefully that prosperity will eventually lead to an increasingly democratic society”.
I am more skeptical than ever that this is possible. I think the best we can hope for with regard the Communist party is a soft authoritarianism like what existed between 2001 and 2010. As long as the Communist party runs the show, true economic freedoms (not to mention other freedoms) will remain a dream.
This has been my concern. In the rush to make the free trade argument sound like a panacea for society, we have ignored the actual costs on those directly affected. That doesn’t call for protectionism, but it does require that we stop ignoring the real downsides for those employed in the impacted industries.
If that’s all one used, one would get a distorted view, indeed, of the timelines involved. The standard undergraduate text uses a supply-demand graph with notionally drawn supply and demand curves, to illustrate market adjustments. Then the professor walks through the adjustment process for both curves, with little discussion of actual delays to adjustments.
What such graphs and profs don’t depict well, then, is that relative timing. Demand adjusts nearly instantaneously to pricing moves and then adjusts again pretty much instantaneously to the resulting demand-driven price movements. Supply always adjusts more slowly to the new price regime and then again more slowly to the newly adjusting price regime until a new price/demand/supply equilibrium is reached.
What those texts don’t very well describe, also, is that equilibrium never is reached–those adjustments are constantly in progress and often out of “cycle” with each other.
All of this is especially true with labor supply and pricing: labor pricing is “sticky”–that is, it does not adjust to pricing very quickly at all. Aside from union behavior (which in today’s world is not overly important, anyway, in the private economy, as union membership is near historic lows and falling), employers are loathe to cut wages–labor prices–as the price they get for their goods falls. It’s much easier to reduce employment. Blame that on a desire to protect the workers he keeps, Federal (and tax) laws, minimum wage laws, state-level labor laws (e.g., right to work vs closed shop)–not exclusively, but these play a major role.
Next consider the specific case. Any Ricardian can tell you exactly what OP hinted at about the adjustment of labor at the national level to what this nation is good at doing vs what that nation is good at doing, and the relative costs involved of doing those things. In a “standard” world, those adjustments, with time lags, would move along with, in the end, no net change in intra-national employment, only in what a particular nation’s labor force actually did. Except these adjustments are constantly on-going, too, especially in an interconnected world, and so equilibrium is never reached here, either.
But the Chinese labor supply is enormous compared to the nations of a “standard” world. It’ll take even longer for international labor supply and pricing (and so goods supply, demand and pricing) to begin to approach some sort of equilibrium.
In the end, the only equilibrium that might ever be come close to would seem to be a quasi-equilibrium in adjustment rate.
Eric Hines
I think economists tend to have a funny view of labor supply and demand. People aren’t fungible. You can’t just train every person for any job.
You could when the theory was developed. Jobs were labor intensive and relatively unskilled. I say relatively because though most could learn a job, experience was still immensely valuable and compensated as such.
Let me present the hard-hearted alternative. There is nothing new about economic change, whether or not China is involved. Agricultural employment plummeted in the US, especially in the late 1800s and early 1900s, while industrial employment increased. People had to adjust. Also, individual industries rise and fall — from candle and oil lamp manufacturers to the makers of VCRs.
Sorry, folks, but people are not entitled to continued employment in their industry of choice. That path leads to economic stagnation and decline.
It is very sad, and disappointing, to read the results of a study indicating that many American workers didn’t successfully adjust to changing circumstances. The best answer is to reduce the inefficiencies in our labor market, particularly by union-busting and reducing regulation.
I wonder how much of the effect noted is due to: (1) generous unemployment benefits (which were extended during the Great Recession) and (2) disability fraud (which I understand to be serious in the Social Security system). If you pay people not to adjust to changing economic circumstances, then guess what — you get what you pay for.
I don’t mean to dismiss the human cost of economic change. But these folks are Americans, and we are supposed to be hard-working and adaptable. The idea that “we” owe it to American workers to maintain their livelihood, in the face of economic changes, is left-wing thinking.
I have never understood why folks have a much bigger problem with job loss that may result from foreign trade than the do with job losses as a result of entirely domestic factors. Can someone help me out?
Indeed. SIL was a rock band drummer, able to make a living at it, if not get stinking, hotel-destroying rich at it. He even was able to contribute meaningfully to his family’s well-being when he married my daughter, including after they had two kids.
But even though daughter has a good paying job and is the primary bread winner, they weren’t able to get ahead, much less save for their future. He became unemployed while he retrains for a different job. We’re helping them out.
That’s the truly critical part: family is helping them out. No government. No federally funded–which means none of you guys’ money–retraining program is involved in his retraining.
His unemployment is voluntary, rather than caused by labor competition. Nonetheless, he’s retraining. Most anybody can retrain, if they put in the effort. And most retraining needs no government prop-up.
Eric Hines
No, people aren’t treated as lab rats.
There are large gains to be had by trade, including foreign trade. It is specialization and trade that make possible our standard of living, which is miraculously high by historical standards.
What I mean by “miraculously high” is this: If you could somehow talk to the ghost of George Washington or Thomas Jefferson, and show him the economic circumstances of the ordinary American, he would be unable to believe you. For example:
[Cont’d]
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All of this is only possible because of trade and specialization.
We know, both from economic theory and empirical research, that trade has enormous advantages.
Here is a hypothetical example. Say there’s a company in the US that makes Star Wars action figures, selling them for $15 each. A company in China has a cost advantage and is able to make the same action figures, and even with higher transportation costs, can sell them for $5 each.
I don’t think that there’s any justice in suggesting that the rest of us have to pay $10 more for our action figures, in order to preserve the US company and the jobs of its employees. They need to figure out something else to do — something productive.
Now action figures are rather silly, but the same principle applies to any product, from toasters to I-phones.
The two concerns are not mutually exclusive. The fact that the American middle class is getting hit from both sides makes the situation even more dire.
But there is an additional dimension when chronic trade imbalances are emboldening a foreign nation to be more confrontational towards US allies and are financing the rapid build-up of a potentially hostile military.
There are two easy tools for suppressing international trade, tariffs and industry specific subsidies. With the added bonus that the people first hurt by the restriction on trade don’t share cultural values with you and can’t communicate with you much at all.
Economists don’t think that people are “fungible,” in the sense that every person is able to do every job.
Conservative economists — and I think conservatives in general — think that adults are responsible for their own jobs and careers. They get to make their own choices, and benefit from their own efforts, or not.
This is an application of the general principle of freedom. Trade with China doesn’t change the principle.
I’m perfectly willing to agree to exceptions, for those who are truly disabled, either mentally or physically. But these categories are very, very small. It seems to me that our current disability system covers people who aren’t remotely “disabled” in any reasonable definition of the word.
I tend agree with what you say at the theoretical level- It’s all good if you have a job in order to take advantage of any of it- and on the added condition that the government isn’t tapping me to pay for the welfare benefits of the workers that trade policies have rendered jobless.
Yeah, India tried that approach, and didn’t really care for the results. I’d much rather live in America in 2016 than in India today, even after its relative opening of late.
How do you suggest we deal with the friction of the unemployed then? Pethokoukis suggest some sort of retraining or relocation money is needed in lieu of welfare. Would you support both, neither, one or the other?
Retraining is largely a joke, but relocation makes a lot of sense, certainly more than paying people to stay in Flint waiting for the revival of the auto biz, for instance.
I believe that there should be a lot less enthusiasm for putting American workers out of work in the first place, especially when the evidence starts revealing the hidden costs (intentionally omitted from pro free-trade arguments or otherwise) .
If we save money on imported products, but then get taxed more to pay for new government bureaucracies and retraining programs and other welfare for displaced workers; what is the net result other than increased government dependency and permitting the government’s tentacles to reach even further into the economy? It strikes me as a big win – for those seeking to expand the size and scope of goverment.
There are winners and there are losers in this globalism game. As always, one needs to follow the money to get to the truth. I don’t believe we get completely objective arguments from either side of the debate.
I do know that I feel absolutely zero obligation to economically develop China.
I wasn’t suggesting they were mutually exclusive. What I am saying is that one (of the foreign variety) gets people up in arms and the other (purely domestic) does not. The ultimate effect of the person who loses their job is the same but one is of much greater concern than the other.
As to your point about a hostile military build up…that is easily proven false. Trade with Mexico has exploded over the past twenty years and people rail on NAFTA and the “giant sucking sound” (notwithstanding the fact this is largely false). I don’t think those same people are concerned about Mexico arming themselves in a hostile manner towards the U.S.
I don’t think anyone is stating that you do or should feel a moral obligation to assists in China’s economic development. However, China’s economic development is a positive for the U.S. as a whole in the long run…at least to the extent we continue to trade with them.
Would you also then consider surrendering any of the benefits you receive as a result of those same trade policies? Perhaps you could then pay a special price for goods that are manufactured overseas. We could calculate the meaningfully higher “domestically manufactured equivalent” price that you would pay for those goods. You know, just to be consistent and all…
For decades after WW II the US was the world’s economic giant for two reasons. First, the rest of the world was rebuilding infrastructure that had been destroyed by the war. Second, much of the world (including China, India, South America, Russia, and much of Europe) adopted Keynesian / socialist policies that stultified or destroyed their economies.
As they say, anything that can’t go on forever, won’t go on forever. China, India, Brazil, the UK, and many smaller countries have moved away from socialism, and unleashed the power of capitalist economic policies. If the US wants to continue its prosperity, it will have to compete against real economies, without the benefit of huge economic rents.
Protectionism won’t solve the problem. If American capital doesn’t flow to other countries (where people are desperate to work) then other sources of capital will fill the void. We cannot keep ourselves rich by keeping most of the world poor. Well, we could, but it would involve dropping a lot of bombs.
I think that we already have retraining programs, as well as very substantial support for education in general. For example, many community colleges offer career education at relatively low expense, in many fields, available equally to dislocated workers and others..
My general impression is that government retraining programs are not very effective, but I haven’t looked for specific studies.
My life experience suggests that training programs will be most effective with motivated students, and that there is relatively little that government can do to create such motivation.
Regarding relocation, I would support some help, probably through a tax deduction. I think that this is already available under the tax code, but I don’t recall the details, and I think that it falls into the category of deductions subject to the 2% floor, which provides little benefit to most. An “above-the-line” deduction would be better.
Like most things, the textbook theory regarding free trade doesn’t seem to be playing out in real life. But it isn’tso much a problem with the theory as with the reality. The unspoken assumptions behind the theory are … Assume perfect capital and labor markets etc. These NEVER exist in reality. Moreover, the trade deals sold under the rubric of ‘free trade’ are often very one sided. In this case, China gets free access to American markets and America gets ….. Just what DOES Ameica get. Free access to Chinese markets? Not so much. So it is hardly surprising that the benefits to ‘free trade’ with China seem skewed.
Lastly though … it is important to realize that WE BROUGHT THIS OUTCOME UPON OURSELVES!!!!
No one forced us to buy the cheap Chinese stuff! We lined up for it! Look in your closet. Go on … Look. Can you find three things in there made in America? You voluntarily bought everything in there … Right? I mean the clothes fairy didn’t just deliver stuff without your knowing. Same thing in the rest of your house. You probably never even gave a thought to where something was made. But if you don’t like where we have ended up, maybe you should.