Import Competition and the Great US Employment Sag of the 2000s

by on June 7, 2013 at 7:40 am in Economics, Uncategorized | Permalink

That is the new paper (pdf) by Acemoglu, Autor, Dorn, and Hanson, and here is the abstract:

Even before the Great Recession, U.S. employment growth was unimpressive. Between 2000 and 2007, the economy gave back the considerable jump in employment rates it had achieved during the 1990s, with major contractions in manufacturing employment being a prime contributor to the slump. The U.S. employment “sag” of the 2000s is widely recognized but poorly understood. In this paper, we explore an under-appreciated force contributing to sluggish U.S. employment growth: the swift rise of import competition from China. We find that the increase in U.S. imports from China, which accelerated after 2000, was a major force behind recent reductions in U.S. manufacturing employment and that through input-output linkages with the rest of the economy this negative trade shock has helped suppress overall U.S. job growth.

If you ask me what knowledge academic economics generated in the past year, one answer is a better sense of how much the rise of China has had an impact on labor markets in other countries.

Elsewhere in labor economics, the econ blogosphere very much underrates and indeed sometimes even scorns “matching theory.”  But this new paper by Larry Katz et.al. (pdf) suggests a calibrated matching model can explain almost all of the rise in observed long-term unemployment.  You will note that this is appended to other, more macro theories of unemployment to “fill in the boxes” and should not be considered a substitute for them.

Benny Lava June 7, 2013 at 8:18 am

So you’re telling me economists think outsourcing is an under appreciated source of job loss? Your profession never ceases to amaze (in a bad way).

Frederic Mari June 7, 2013 at 8:31 am

Lol. Cut to the chase…

But, to give economists credit, it’s always easy to appreciate your loss when your job got outsourced and somewhat more complicated to integrate second-degree orders when 1- you get cheaper products and 2- you get more demand for your own goods and services as your trading partners are suddenly wealthier…

prior_approval June 7, 2013 at 8:47 am

The Chinese deficit with the U.S. is long running and large – one could call it a wealth transfer, except Americans hate doing that.

Well, except when it is a bargain or oil – then, it seems, they have no problems.

ChrisA June 8, 2013 at 8:41 pm

Yes its a wealth transfer. The Chinese get green bits of paper (actually not even that, just a promise of green bits of paper) and the US gets material goods. Seriously, if there is a fool in this relationship it is the chinese, they are working their butts off at low wages to supply the US with cheap goods. What’s not to like if you are a US citizen. Its a like someone created a machine that made anything you wanted for basically nothing, and then you complain that you don’t have anything to do.

Benny Lava June 7, 2013 at 10:40 am

Tyler calls it the great stagnation and Scott Sumner calls it the greatest increase in prosperity in human history.

Brock June 7, 2013 at 10:45 am

This. What exactly did the economic profession think that “comparative advantage in labor costs in tradeable goods sectors” was going to do?

Peter Schaeffer June 7, 2013 at 12:06 pm

@BL,

“So you’re telling me economists think outsourcing is an under appreciated source of job loss? Your profession never ceases to amaze (in a bad way).”

+1

If it wasn’t for the prevailing dominance of cosmopolitan globalization, this would have front page news from 2000 onwards. Of course, you could say the same thing(s) about the obvious (and large) downsides of mass low-skill immigration.

As early as 2005, Martin Wolf (FT) was talking about global imbalances. The same Wolf gave a lecture in 2005 titled “Will Asian Mercantilism Meet its Waterloo?”. The dominant responses were along the lines of

“Trade deficits are good for America”
“Foreigners just want to invest in America”
“We don’t have a trade deficit, we have a capital surplus”
“We need cheap towels, more than we need jobs”
“Jesus Christ is Free Trade and Free Trade is Jesus Christ”

OK, the last one is from Bowring. Bowring is (in)famous for starting the Second Opium War that including the looting and burning of the Summer Palace.

Peter Schaeffer June 7, 2013 at 2:50 pm

An early paper on the impact of the China trade can be found at

“Putting a Smiley Face on the Dragon: Wal-Mart as Catalyst to U.S.-China Trade”

Peter Schaeffer June 7, 2013 at 6:33 pm

Let’s see here, we have massive job losses from trade. What should we do about it? How importing 17 million foreigners (2000-2013) to take the jobs that don’t exist?

Welcome to America.

Steve Sailer June 7, 2013 at 8:19 pm

Dear Tyler:

You’ve probably mulled this over: What would be the career pluses and minuses for you if you announced a formal apology in the New York Times for your backing low-skilled immigration for all those years? Would you be completely Richwined? Or would it be the beginning of a crack in the dam of Establishment stonewalling over their guilt in this giant mistake?

Steve

Frederic Mari June 7, 2013 at 8:29 am

This is very interesting stuff. I’ve always felt quite ill-at-ease discussing trade and immigration because, contrary to most liberals and, more importantly, contrary to most economists, I am not in favor of free trade, regardless of circumstances.

I think free trade can be good when countries are massively different and can basically benefit from exchanging widely different goods. Say, exchanging petrol for food. OTOH, I think that trade can ALSO be beneficial when countries are very similar. Say, France and Germany. Exchanging Renaults for Volkswagens and vice-versa. But I do see a problem when one trading partner starts phagocitasing the other.

And, here, cases like Japan in earlier times but, above all else, China versus the USA and Germany versus the rest of Europe are definitely troublesome.

prior_approval June 7, 2013 at 8:43 am

‘…Germany versus the rest of Europe are definitely troublesome.’

The Finns, the Swedes, the Danes, the Norwegians, the Dutch, the already mentioned French, the Swiss, the Austrians, and the northern Italians (complicated, but a necessary distinction) would beg to differ. And, as far as it goes, the Czechs, Slovaks, and the Poles would probably not phrase it that way.

Though the UK and the Greeks would definitely agree.

egl June 7, 2013 at 12:22 pm

“I think free trade can be good when countries are massively different..”

Or perhaps when a country can be regarded as monolithic, so the net benefit is spread evenly throughout the country rather than the result of some winners (my cheap shirts) and losers (your job).

prior_approval June 7, 2013 at 8:38 am

Strange – almost as if the trade deficit with China alone (calculatedrisk does a nice job breaking this down – and has for years) wasn’t a big enough clue.

Or maybe economists feel that cause and effect is too philosophical to be reliable in this data driven era?

Bill June 7, 2013 at 8:53 am

QE and dollar devaluation relative to renminbi doesn’t look so bad now does it.

Andrew' June 7, 2013 at 9:14 am

If you believe all the models of a profession that just now incorporated something into their models.

Dan Cole June 7, 2013 at 9:11 am

Shouldn’t the rise in US imports from China have increased employment in import sectors, offsetting at least in part job losses in manufacturing?

Dan

Derek June 7, 2013 at 9:58 am

It did for a while. Retail, the housing boom all were effected by the decrease in prices.Unfortunately the market for all this stuff needs to be employed.

My question is why policy makers in the face of low cost competition dare do anything that increases costs of production in the US.Maybe because they listen to economists? The ones who missed this and in large part missed the severity of the downturn.

Peter Schaeffer June 7, 2013 at 12:22 pm

@Dan Cole, @Derek,

Simplifying a bit… The import surge from China (and elsewhere) hollowed out the U.S. economy creating deep and pervasive weakness in jobs, employment, wages, investment, etc. The Bush administration knew all of this, but reasons of ideology (free trade dogma) and greed (Bush was 100% aligned with the corporate interests profiting from outsourcing tradeable goods production to China), no Washington response was possible other than rabid support.

Of course, since the economic weakness inherent in gutting the productive core of the U.S. economy was real, Bush (more broadly the Washington establishment) needed something to keep the U.S. economy at least partially afloat. The housing bubble was the obvious solution. Housing production can’t be outsourced and the bubble was deeply popular with much of the public and both parties. Add in the fantasies about extending the ‘ownership society’ to minorities and you have the perfect storm.

Of course, many (most?) of the housing construction jobs went to illegals, but that’s another story.

As we all know, the bubble burst and plunged the U.S. into the Great Recession which in many respects is still with us. So there you have it. From ‘free’ trade dogma to a permanent (so far) U.S. economic downturn in a few easy steps.

Derek June 7, 2013 at 1:47 pm

I would put it all a bit earlier. This decade is characterized as the results of the last, same with the 00′s.The hollowing out started earlier and was finished, bubble style in the last decade.Free trade has the same benefit and cost of free markets, exposing weakness and destroying. The successes of the 90′s and the growth due to financialization, and the remarkable gains from high tech, which benefits few, fooled policy makers into thinking things were better than they thought.

Derek June 7, 2013 at 1:56 pm

I’ve heard too often that the 10% or so that are extremely productive are the source of growth, the future for the country. The unsaid is that the rest will be dependent on redistribution of that wealth, being hopelessly uncompetitiveThe policy directions are to replicate the costs and government structures of Boston without the wealth generation.

make a prediction. It won’t work. The costs imposed on the wealth generators by such a scheme will insure that just like manufacturing, it will happen somewhere else.

Derek June 7, 2013 at 3:01 pm

Bah. Durn phone editing.

asdf June 7, 2013 at 9:37 am

Wait wait wait!!!

Are you telling me that for the last couple decades when capital was routinely threatening labor that they would move the factory to Mexico (and then China) if they didn’t accept concession and wage cuts XYZ that they were actually telling the truth?

Thanks for getting around to figuring out what everyone else knows.

jdm June 7, 2013 at 10:14 am

Yeah, this effect has been pretty obvious to everyone not wearing economist blinkers for a long time. Add the complete failure of the economics profession to predict the great recession. Add its complete inability to agree on optimal economic policies going forward. Add that a lot of the economics debate seems based in the 1930s and on back of the envelope calculations using childishly simple models. Add that despite (because of?) all the fundamental disagreements in the profession about macro policies, the debate is extremely acrimonious and each side utterly convinced that it is totally correct and the other parties are totally wrong. It makes you kind of wonder whether the profession has anything useful to say on the macro level.

J June 7, 2013 at 11:00 am

Yes because posting empirical evidence to back up a long understood economic trend is soooooooooooooo stupid and pointless

Alan H. June 7, 2013 at 12:16 pm

The empirical evidence has been posted by the Fed, Treasury, et al for more than12 years: Huge trade deficits with China, ever-decreasing manufacturing employment in the US, with both sides (capital and labor) unwilling to bear the pain required to shift the US away from over-consumption, makes a rather clear picture. We are unwilling to tax corporate capital for its race offshore to maintain its US-sales margins. We’ve bought off labor, which otherwise would be marching in the streets, by borrowing enormous sums of money to fund civil service and health-care jobs we cannot afford. It is foolish to go broke first before facing problems. Tell that to the myopic greedy American voter.

jdm June 7, 2013 at 1:08 pm

Empirical evidence backing up a long understood economic trend is excellent. I’d love to see more of it. What I am skeptical of is the “long understood part”. To most people outside of economics, this trend has been long understood (in an intuitive way) and appreciated. But for the economics profession, it was (is?) “an under-appreciated force”.

J June 7, 2013 at 1:41 pm

@Alan H. Wouldn’t taxing US owned corporations that move manufacturing abroad and then import into the US just cause us to lose out to Foreign owned corporations that manufacture abroad and import into the US? Tell me why I am wrong. I’m not an expert

JWatts June 7, 2013 at 2:14 pm

That’s exactly what would happen. You’d have to tax exports to have any effect and that would set off a trade war. There are no easy answers. All that being said, Chinese labor has become significantly expensive between 2000 and 2013. Over time, the pressure on American wages will be reduced as the differential drops. However, that time period could be measured in decades.

Peter Schaeffer June 7, 2013 at 3:18 pm

@J,

“Wouldn’t taxing US owned corporations that move manufacturing abroad and then import into the US just cause us to lose out to Foreign owned corporations that manufacture abroad and import into the US? Tell me why I am wrong. I’m not an expert”

Yes and no. Foreign corporations producing abroad and shipping to the U.S. don’t have a much political influence as domestic firms that have outsourced production and now want to import the goods.

To use a real-world example, a few decades ago Japanese firms were massively exporting cars to the U.S. provoking considerable domestic opposition inside the U.S. The U.S. put so much pressure on the Japanese firms that they moved much of the production to transplant factories in the U.S. The results were highly positive in terms of U.S. jobs.

To some degree this was only possible because the cars were made abroad by foreign firms who had less (near zero) political clout in the U.S. By contrast, the current generation of outsourcers are U.S. firms (Apple being the worst example) and are largely shielded from political pressure.

J June 7, 2013 at 3:33 pm

@Peter Schaeffer,

“Yes and no. Foreign corporations producing abroad and shipping to the U.S. don’t have a much political influence as domestic firms that have outsourced production and now want to import the goods.”

Japan wasn’t beating US manufacturers because of significantly cheaper labor they were beating US manufacturers because they produced better cars (or cheaper and more fuel efficient cars) than domestic firms. And this isn’t the 90s, global trade is only going to increase right? More FTA’s. etc.

I guess my point is the only way for us to recapture lost competitive advantage without dramatically driving down wages would be to reduce corporate taxes right? Lobbying the federal government can only get you so far.

ad nauseum June 7, 2013 at 11:22 am

Wow, look at all the economist bashing. The economists knew that increased relations with China could result in manufacturing-sector-specific declines in employment. They’ve just been saying that in spite of that, both nations benefit as a whole from free trade with each other. Don’t try to change the argument.

Alan H. June 7, 2013 at 12:21 pm

Of course the profession is being bashed. They were wrong on a monumental scale. Repeatedly. Their measure for what it means for a nation to “benefit as a whole” is defective. GDP is not a good measure. Much of what goes into the GDP calculation is utterly worthless, meaning the nation as a whole would have been better off if certain transactions never took place, though GDP would be lower.

Peter Schaeffer June 7, 2013 at 3:23 pm

@Alan H.,

You really need to read “Deconstructing economists’ take on free trade” by Dani Rodrik. Quote

“Once in a while you come across a paper that makes you nod in agreement and go “yes!” with every sentence you read. Robert Driskill’s Deconstructing the Argument for Free Trade is such a paper. Driskill is a distinguished economist who knows the theory of comparative advantage as well as anyone else. And his argument is not against trade per se, but about the manner in which economists present their arguments in public and in their textbooks. His main argument is that the standard renditions

gloss over a key issue the resolution of which is anything but obvious: What does it mean for a change in economic circumstances to be “good for the nation as a whole”, even when some members of that nation are hurt by the change?

In other words, instead of sticking to what they are good at–analyzing trade-offs–economists typically engage in amateur normative political theorizing about what is good for society ”

http://rodrik.typepad.com/dani_rodriks_weblog/2007/09/deconstructing-.html

jdm June 7, 2013 at 1:23 pm

“The economists knew that increased relations with China could result in manufacturing-sector-specific declines in employment.”

The paper argues that the direct effect on manufacturing jobs has been so enormous that it has spilled over into other sectors, resulting in an overall very weak labor market. This is something any randomly chosen blue collar worker could have told you ten years ago, but it is evidently a surprise (at least according to the paper) to most of the economics profession.

Mike H June 7, 2013 at 11:38 am

I think I can never understand some of the sentiments here, but I will try to make some sense out of it. According to the argument, we should stop importing things from China in order to bring all those manufacturing jobs back home, correct? And so with all those jobs back home and all the blue-collar, low-skill Americans get back to the factories and work happily thereafter, the concerned economists can declare victory and everyone (in America) can be satisfied. Is that it?

But then again, how about the iphones, electronic gadgets, toys that were being imported from China? How can those blue-collar, low-skill Americans still afford to pay for their iphones when we no longer have those Chinese workers on the assembly lines in Guangzhou who are willing to work for $150 a month? Who are you to decide that they should work in an assembly line while not being able to pay for an iphone, instead of the current situation where they either sit home collecting welfare checks or doing whatever random jobs they can find?

Anyone ever calculate the regression of American living standards if we really “bring those jobs back home”?

Frederic Mari June 7, 2013 at 11:50 am

Hmmm… Instead of being automatically prices that rise from onshoring, it could be profit margins that go down…

I know, I know, heresy. Still, I’ve got this nagging feeling it’s possible…

Peter Schaeffer June 7, 2013 at 12:32 pm

@Mike H,

For the U.S. economy as a whole, using unemployed workers to produce import replacement isn’t just free, it’s an almost pure gain in GDP. Why? Because the unemployment workers are now producing real goods and services and eliminating payments to foreigners.

Let me use an analogy. Say you need to have your house painted. A commercial painter will do it for $100. Your unemployed brother (who lives with you) will do it for $200. Who’s cheaper? From your perspective, the commercial painter is cheaper. However, from the perspective of your family, your brother is cheaper. Why? Because he is otherwise idle and the $200 is simply a transfer within the family. Paying your brother costs the family nothing and raises family output. By contrast, paying the commercial painter costs $100 and leaves family output unchanged.

Stated in terms of the United States, the unemployed are part of our nation (assuming they are legal residents). Using them to produce textiles (now produced in China) costs the United States nothing (it’s just a transfer). It will however raise U.S. GDP and put the unemployed back to work. Of course, textile prices will go up. However, the gains to the formerly unemployed are (much) larger than the losses to consumers. Think about it for a second, they (the gains) have to be larger. Why? Because GDP has gone up in this model.

Dan in Euroland June 7, 2013 at 1:32 pm

Paying your brother costs the family nothing and raises family output.
————

Opportunity cost of using the $100 elsewhere. Damn dude, try harder, your hypo was terrible.

JWatts June 7, 2013 at 2:21 pm

Yes, that’s a terrible hypothetical.

If the brother then spends the $200 on personal consumption the family is out an extra $100.

The only way to make the scenario work is to require the brother to then turn around and give/spend at least $100 to another family member. At that point, you are basically saying he’s got to paint the house for $100. Ergo, his wages have dropped to foreign levels so that his labor is competitive.

Peter Schaeffer June 7, 2013 at 2:48 pm

@JWatts,

“If the brother then spends the $200 on personal consumption the family is out an extra $100″

In my example, the first brother had $200 (by definition). Whether the first or second brother spends the money, has no effect on total family consumption. What is true, is that because $100 didn’t go to an outsider (a non-family member), total family consumption increases by $100 (assuming all funds are spent).

If the second brother did the work for $100, the first brother would then be indifferent as to the choice of painter. However, having the second brother do the work still raises total family consumption (potential consumption) by $100. Why? Because the second brother now has $100 that would have otherwise gone to a non-family member.

Note that total family consumption goes up (with the second brother doing the work) irrespective of the price paid to the second brother. That price could be zero, $100, $200, or anything. As long as the funds go to the second brother, it’s just a transfer in the family. The eliminated payment of $100 to the non-family member always raise total family potential consumption.

Peter Schaeffer June 7, 2013 at 2:39 pm

@Dan,

If the family uses the brother to paint the house (for $200), the money is still in the family. The $100 originally intended to hire the commercial painter, can be still be spent. The opportunity cost is zero. Indeed, by spending the $100 total family consumption can be raised by $100 over the original case of where the commercial painter was hired.

Dan in Euroland June 7, 2013 at 3:36 pm

So the brother doesn’t get the money even if he paints the house?

Peter Schaeffer June 7, 2013 at 4:12 pm

@Dan,

“So the brother doesn’t get the money even if he paints the house?”

What I am saying is that it doesn’t matter if the brother pays $50 for the privilege of painting the house, gets $0, $100, $200, etc. All transfers within the family, don’t change total family potential consumption. They might change who does the consumption, but not the amount of family consumption.

However, using the unemployed brother at any price (zero, positive, or negative) raise total family potential consumption by $100.

Peter Schaeffer June 7, 2013 at 3:32 pm

@Dan, @JWatts,

Abraham Lincoln demonstrated a pretty good grasp of this issue well before the Civil War.

“I don’t know much about the tariff, but I know this. If I buy a coat in England, I get the coat and England gets the money. If I buy a coat in America, I get the coat and America gets the money.”

JWatts June 7, 2013 at 5:14 pm

I agree it would make sense if the coat cost the same. Once the costs change is where your argument starts treading on thin ice.

And in a related note, does your whole family drive cars manufactured in America?

Mike H June 7, 2013 at 4:51 pm

Woohoo, I think we just witnessed Peter single-handily reanimated mercantilism from the grave!

jdm June 7, 2013 at 1:33 pm

“According to the argument, we should stop importing things from China in order to bring all those manufacturing jobs back home, correct? And so with all those jobs back home and all the blue-collar, low-skill Americans get back to the factories and work happily thereafter, the concerned economists can declare victory and everyone (in America) can be satisfied. Is that it?”

I wouldn’t make that argument. There are, as you note, huge benefits to trading with China. But my sense for a long time is that economists have not a a good grasp of the cost side of the ledger. Or maybe they have had a good grasp, but since it was someone else – some low skilled guy from northern Indiana – who was bearing the cost, while the economists were part of the class reaping most of the benefits (cheap imports), they haven’t really emphasized the real costs of things like lower wages and less employment opportunities for the less skilled. I think this attitude s starting to change, but if you made an argument ten years ago that China was going to have huge negative effects on US employment (and not just in manufacturing) the vast majority of economists would have ridiculed you.

whatsthat June 7, 2013 at 12:32 pm

I thought it was the great stagnation.

Maybe what is going on is that productivity has remained stagnant, and the export of jobs to China is a way of countering this.

Message and messenger are being confused perhaps.

asdf June 7, 2013 at 7:57 pm

Dear Economists:

No matter how well you breed, no matter how good a gated community you live in, your children and grandchildren will eventually revert to the mean. When that happens they will share the fate of the average American.

x June 8, 2013 at 1:20 am

In the long term, we are all dead, regardless of whether we reverted to the mean or not before that.

Mike in Qingdao June 8, 2013 at 12:25 am

It is difficult to convince a man to believe something when his salary depends on him not believing it.

I suppose the mercatus center, along with the American chamber of commerce, heritage foundation and so on supported MFN trade status for China and it’s acceptance into the WTO.

Matt G June 8, 2013 at 6:52 am

On the other hand, 680 million people have been raised out of poverty in China in the last 30 years. And the global poverty rate’s fallen from 43% to 21%.

http://www.economist.com/news/briefing/21578643-world-has-astonishing-chance-take-billion-people-out-extreme-poverty-2030-not
Perhaps free trade hasn’t actually been a net benefit for America…but it sure seems good for humanity.

Mike H June 8, 2013 at 4:12 pm

The net benefit, as I have pointed out above is that even the Americans who have no skill, lost jobs due to outsourcing, and are unwilling to work in hard manual labor can still afford to buy new iphone and drive a car. Do you think they want to swap places with the Indians and Chinese who work in the assembly lines that produced those iphones?

Minmay June 9, 2013 at 7:00 am

I wonder whether the gains from trade with China, being so concentrated among high income households as they were, even managed to outweigh the losses concentrated among low and medium income households. It’s a shame free trade makes it impossible to compensate the losers, isn’t it?

Comments on this entry are closed.

Previous post:

Next post: