Trade and Labor Markets

October 13-14, 2017
Supported by the Smith Richardson Foundation
Gordon H. Hanson of the University of California at San Diego and Stephen J. Redding of Princeton University, Organizers

Robert C. Feenstra, University of the California at Davis and NBER, and Hong Ma and Yuan Xu, Tsinghua University

US Exports and Employment

Feenstra, Ma, and Xu examine the employment responses to import competition from China and to global export expansion from the United States, both of which have been expanding strongly during the past decades. They find that although Chinese imports reduce jobs, at both the industry level and the local commuting zone level, the global export expansion of U.S. products also creates a considerable number of jobs. On balance over the entire 1991-2007 period, job gains due to changes in U.S. global exports were slightly less than job losses due to Chinese imports. Using data at both the industry level and the commuting zones level, the researchers find a net loss of around 0.2-0.3 million jobs. When Feenstra, Ma, and Xu extend the analysis to 1991-2011, they find the net job effect of import and export exposure is roughly balanced at the commuting zone level.

Illenin Kondo, the University of Notre Dame

Trade Displacement Multipliers: Theory and Evidence Using the U.S. Trade Adjustment Assistance

Administrative data from the U.S. Trade Adjustment Assistance (TAA) program reveal that, across locations, one extra TAA trade-displaced worker is associated with overall employment falling by about two workers. This finding, presented by Kondo, is robust to local Bartik-style import penetration measures, suggesting a role for within-industry heterogeneity. A Ricardian trade model with endogenous variable markups can rationalize such a trade displacement multiplier. In the medium run following a trade liberalization, employment and earnings collapse in the less productive locations because of both higher trade-induced job losses and lower job creation, as in the data. Earnings inequality increases and prompts transitional transfers towards decaying locations, even as aggregate employment rises amidst muted geographic mobility.

Eunhee Lee, the University of Maryland, and Kei-Mu Yi, the University of Houston and NBER

Global Value Chains and Inequality with Endogenous Labor Supply

Lee and Yi assess the role of global value chains transmitting global integration shocks to aggregate trade as well as distributional outcomes. The researchers develop a multi-country general equilibrium trade model that features multi-stage production, with different stages having different productivities and using factors (occupations) with different intensities. The model also features a Roy mechanism, in which heterogeneous workers endogenously choose their sector and occupation. Country- and workerlevel comparative advantages interact. A reduction in trade costs leads to countries specializing in their comparative advantage sectors and production stages. This specialization changes labor demand and also leads to more workers shifting to the comparative advantage sectors and occupations. The researchers show that the intensity of the global value chain magnifies the aggregate effects of trade liberalization, but it has a nonmonotonic effect on the skill premia. Lee and Yi's counterfactuals show that China's integration into world economy increases the skill premium in both the U.S. and China, but sectoral variation in GVC intensity limits the size of distributional impacts.

Spencer Lyon, New York University, and Michael E. Waugh, New York University and NBER

Redistributing the Gains From Trade through Progressive Taxation

Lyon and Waugh study the optimal degree of tax progressivity as an economy opens to trade. They answer this question within a standard incomplete markets model with frictional labor markets and Ricardian trade. Labor market frictions lead to losses in labor income and reductions in labor force participation for import-competition-exposed workers. In an incomplete markets setting, adverse shocks to comparative advantage are imperfectly insured and import competition-exposed workers experience welfare losses. A progressive tax system provides a mechanism to transfer resources to the losers from trade and to substitute for imperfect insurance against comparative advantage risk. However, a progressive tax system reduces incentives to work and for labor to reallocate from comparative disadvantaged locations to locations with a comparative advantage. The researchers calibrate the model to match the observed labor market response to trade exposure and solve for the optimal degree of progressivity of the tax system. Preliminary results find that the optimal tax system should be more progressive with exposure to trade.

Runjuan Liu, the University of Alberta, and Daniel Trefler, the University of Toronto and NBER

A Sorted Tale of Globalization: White Collar Jobs and the Rise of Service Offshoring (NBER Working Paper No. 17559)

Liu and Trefler study how the rise of trade in services with China and India has impacted U.S. labor markets. The topic has two understudied aspects: it deals with service trade (most studies deal with manufacturing trade) and it examines the historical first of U.S. workers competing with educated but low-wage foreign workers. The researchers empirical agenda is made complicated by the endogeneity of service imports and the endogenous sorting of workers across occupations. To develop an estimation framework that deals with these, the researchers embed a partial equilibrium model of 'trade in tasks' within a general equilibrium model of occupational choice. The model highlights the need to estimate labor market outcomes using changes in the outcomes of individual workers and, in particular, to distinguish workers who switch 'up' from those who switch 'down.' (Switching 'down' means switching to an occupation that pays less on average than the current occupation). Liu and Trefler apply these insights to matched CPS data for 1996-2007. The cumulative 10-year impact of rising service imports from China and India has been as follows. (1) Downward and upward occupational switching increased by 17% and 4%, respectively. (2) Transitions to unemployment increased by a large 0.9 percentage points. (3) The earnings of occupational 'stayers' fell by a tiny 2.3%. (4) The earnings impact for occupational switchers is not identified without an assumption about worker sorting. Under the assumption of no worker sorting, downward (upward) switching was associated with an earning change of -13.9% (+12.1%). Under the assumption of worker sorting, there is no statistically significant impact on earnings.

Rafael Dix-Carneiro, Duke University and NBER, and Brian K. Kovak, Carnegie Mellon University and NBER

Margins of Labor Market Adjustment to Trade (NBER Working Paper No. 23595)

Dix-Carneiro and Kovak use both longitudinal administrative data and cross-sectional household survey data to study the margins of labor market adjustment following Brazil's early 1990s trade liberalization. The researchers document how workers and regional labor markets adjust to trade-induced changes in local labor demand, examining various adjustment margins, including earnings and wage changes; inter-regional migration; shifts between tradable and non-tradable employment; and shifts between formal employment, informal employment, and non-employment. The researchers results provide insight into the regional labor market effects of trade, and have important implications for policies that address informal employment and that assist trade-displaced workers.

Justin R. Pierce, Federal Reserve Board, and Peter K. Schott, Yale University and NBER

Trade Liberalization and Investment: Evidence from the U.S. Granting of PNTR to China

This paper examines the effect of a change in U.S. trade policy on the investment behavior of manufacturing establishments. Using a difference-in-differences identification strategy, Pierce and Schott find that industries more exposed to reductions in import tariff uncertainty exhibit relative declines in investment after the change in trade policy. However, an examination of heterogeneous responses within industries reveals that this effect is concentrated among establishments with low initial levels of capital intensity, skill intensity and labor productivity. Consistent with a reduction in uncertainty, researchers also find evidence that establishments' investment activity becomes less lumpy following the policy change.

Benjamin G. Hyman, University of Pennsylvania

Can Displaced Labor Be Retrained? Evidence from Quasi-Random Assignment to Trade Adjustment Assistance

This paper studies 20 years of worker-level earnings and re-employment responses to Trade Adjustment Assistance (TAA) — the United States' largest and longest standing public incentive program for retraining. Hyman estimates causal effects from the quasi-random assignment of TAA cases to investigators of varying approval leniencies. Using employer-employee matched Census data on 300,000 displaced workers, he finds large initial returns to TAA. Ten years out, TAA-trained workers have $50,000 higher cumulative earnings, driven by both higher incomes and greater labor force participation. Yet annual returns fully depreciate after ten years. TAA appears to have no effect on formal education, and decaying returns are restricted to states with low training durations. This suggests that TAA may augment transient rather than permanent components of human capital. Workers in the most disrupted regions receive only half of the positive returns to training of workers displaced in healthier labor markets, in spite of the fact that they are more likely to move to locations and industries with better employment opportunities. The researcher considers the roles of spatial adjustment frictions and state variation in training-to-insurance ratios to rationalize these results.

Shushanik Hakobyan, International Monetary Fund, and John McLaren, the University of Virginia and NBER

NAFTA and the Gender Wage Gap

Using US Census data for 1990-2000, Hakobyan and McLaren estimate effects of NAFTA on US wages, focusing on differences by gender. They find that NAFTA tariff reductions are associated with substantially reduced wage growth for married blue-collar women, much larger than the effect for other demographic groups. We investigate several possible explanations for this finding. It is not explained by differential sensitivity of female-dominated occupations to trade shocks, or by household bargaining that makes married women workers less able to change their industry of employment than other workers. The researchers find some support for an explanation based on an equilibrium theory of selective non-participation in the labor market, whereby some of the higher-wage married women workers in their industry drop out of the labor market in response to their industry's loss of tariff. However, this does not fully explain the findings so there is room for future research.

Brian J. Asquith, NBER; Sanjana Goswami and Antonio Rodriguez-Lopez, the University of California at Irvine; and David Neumark, the University of California at Irvine and NBER

U.S. Job Flows and the China Shock

International trade exposure affects job creation and destruction along the intensive margin (job flows due to expansions and contractions of firms' employment) as well as along the extensive margin (job flows due to births and deaths of firms). Asquith, Goswami, Neumark, and Rodriguez-Lopez use 1992-2010 yearly employment data from the universe of U.S. establishments to construct job flows at both the industry and commuting-zone levels, and then estimate the impact of import exposure from China on each job-flow type. They find that the 'China shock' affects U.S. employment mainly through deaths of establishments. At the commuting-zone level, the researchers find evidence of job reallocations from the Chinese-competition exposed sector to the non-exposed sector. This happens in spite of a reduction in the non-exposed sector's gross rate of job creation because of an even greater reduction in the gross rate of job destruction.

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