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By Maximiliano Dvorkin, Economist

In theory, trade is good. In practice, considerable debate exists on whether importing foreign goods has an adverse effect on the domestic economy (and on the labor market in particular). The impact of this effect depends on whether foreign goods compete with or complement local production.

For example, if imported computers can easily substitute for domestically produced computers, then the domestic production of computers and employment in the computer and electronics industries will most likely fall with an increase in imports. On the other hand, if computers are used as inputs to produce other domestic goods, like bank services, local production costs of banking services will be lower with cheaper computers, and, all else equal, domestic production and employment will likely rise in the banking industry.

In the working paper, The Impact of Trade on Labor Market Dynamics, which I co-authored with Lorenzo Caliendo and Fernando Parro, we studied the effects of an increase in imports from China on U.S. labor markets.

Our model accounted for the way that foreign goods can displace or complement U.S. production. We looked at state-level data on 22 industries in the U.S., ranging from manufacturing to services. Specifically, our model accounted for:

How the outputs of one industry are used as the inputs in another

The costs of moving goods across space, either across countries or across regions within a country

The costs workers face when they switch from one industry to another or when they move from one state to another

We reproduced the large increase in imports from China between 2000 and 2007 and analyzed its effects on U.S. labor markets across states and industries. We found that increased Chinese competition reduced manufacturing employment by 0.6 percentage points (or about 1 million jobs) over 10 years.

However, not all industries within manufacturing responded in the same way. Sectors that were more exposed to import competition from China lost more manufacturing jobs. For instance, the computer and electronics industry and the furniture industry combined to contribute about half of the decline in manufacturing employment, and the metal and textiles industries together contributed about one-fourth of the total decline.

Meanwhile, the food, beverage and tobacco manufacturing industry gained employment, as it was less exposed to China and benefited from cheaper intermediate goods. Furthermore, our model suggested that displaced manufacturing workers moved to the services sector, which benefited from the access to cheaper intermediate inputs from China.

Our work showed that trade shocks had heterogeneous effects across different labor markets and that some labor markets are adversely affected in terms of employment and welfare. It also showed that most regions and sectors gained from the increased commerce with China, and overall welfare gains can be sizable.

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