Labor market adjustment to international trade.

AuthorAutor, David
PositionResearch Summaries

The past two decades have seen a fruitful debate on the impact of globalization on U.S. labor markets. Research by economists in the 1990s revealed that while international trade, particularly in the form of offshoring, was associated with modest increases in the wage premium for skilled labor, other shocks, including skill-biased technical change, played a more important role in the evolution of the U.S. wage structure. (1) Recent evidence suggests that since the early 1990s, expanding global trade, propelled by China's spectacular growth, is playing a much larger role in the U.S. labor market.

One factor limiting trade's impact on U.S. labor was that, historically, imports from low-wage countries were small. As recently as 1990, low-income countries accounted for less than 4 percent of U.S. manufacturing imports. With China's emergence as a global economic power, the situation has changed markedly. Today, China accounts for one-fifth of the manufactured goods that the United States purchases from abroad.

The causes of China's manufacturing surge are its strong comparative advantage in labor-intensive production coupled with a rapid overall rate of economic growth. Its comparative advantage, which lay dormant during the decades of global economic isolation imposed by Mao, was unleashed in dramatic fashion by the reforms of the 1980s and 1990s, which also contributed to progressive increases in the country's aggregate productivity. For U.S. manufacturing, which still accounts for the majority of U.S. trade, China's expansion represents a substantial competitive shock. Compounding the effects of this shock are trade imbalances in both China and the United States. Large Chinese trade surpluses along with large U.S. trade deficits mean that increases in U.S. imports from China have not been offset by corresponding increases in U.S. exports to China.

The emergence of China from being a technologically backward and largely closed economy to the world's third largest manufacturer in just two decades provides a unique opportunity to learn about the impact of international trade on labor market outcomes. In a series of recent papers with various co-authors, we have sought to trace out these impacts.

Local Labor Market Impacts of Import Competition

Because trade shocks play out in general equilibrium, assessing their causal effects presents a conceptual and empirical challenge. One needs to map many industry-specific changes (attributable, say, to industry productivity growth in China) into a small number of aggregate outcomes. Our solution to this "degrees of freedom" problem is to use regional economies as laboratories in which to study the labor market consequences of trade. (2)

In work with David Dorn, we relate changes in labor-market outcomes from 1990 to 2007 across U.S. local labor markets to changes in exposure to Chinese import competition. (3) These local labor markets are subject to differential trade exposure according to their initial patterns of industry specialization. Some regions, such as Raleigh, North Carolina, specialize in industries such as furniture that are heavily exposed to trade with China, whereas others, such as Fresno, California, specialize in fruit and vegetable products that are lightly exposed.

We find that greater import competition from China affects local labor markets not just through manufacturing employment, which unsurprisingly is adversely affected, but also along other margins which have escaped notice in earlier research. Local labor markets facing rising...

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