Trade and Employment

I teach my undergraduates that trade has no long-run effect on aggregate employment. I teach it because it’s right, and very few economists would disagree. Tyler Cowen’s recent postings on MR about the negative employment effects of trade have the potential to mislead. To the extent that trade and technology correlate with persistent disemployment in local areas, this is a reason to think that there are structural inefficiencies in the labor market. If these structural rigidities exist, then it can be hard for people who lose jobs to get new ones. Anything that disrupts existing employment patterns — trade, technology, macroeconomic changes like price shocks — will then associate with employment declines.

What are these structural inefficiencies? For market monetarists, the “zero lower bound” is a favorite. But we’re now five years out from the NGDP shock that plausibly caused the big increase in U.S. unemployment. The rise in the minimum wage, the extensions of unemployment insurance, the expansion of welfare programs like food stamps, and perhaps most importantly, housing lock-in due to the collapse of the real-estate bubble are all plausible candidates. But these structural rigidities deserve the real blame for disemployment, not trade and technology. Blaming trade and technology is a bit like blaming the weather. Labor markets will always be disrupted by something or other. Policy makers cannot insulate an economy from shocks. What they can do is gum up the works so that the economy cannot respond nimbly to these shocks.

6 thoughts on “Trade and Employment

  1. I don’t buy the structural criticism at all. You even said it was the “NGDP shock that plausibly caused the big increase in unemployment.” What’s NGDP growth right now? 3% roughly? That’s very low. Structural adjustments are much easier with higher growth. The longer low growth persists the worse it will get. Seems kind of mean to beat up on the workers here.

    1. I’m not sure how this gets read as “beating up on workers”! If anything, I’m beating up on politicians. NGDP growth has been on that 3% trend for a while, so I don’t think the initial NGDP shock alone can explain a whole lot of unemployment or low LF participation today. In combination with structural factors that make wages sticky, sure. But in the absence of those structural factors, wages would have adjusted by now.

      1. I get that argument. But if that we’re true then wouldn’t we see certain wages in certain industries exploding? Wouldn’t we see more churn among higher skilled employees? In some small areas you see this, but overall this is the exact opposite story you hear and see.

        Sorry, but this is a demand issue not a supply one. Maybe low geographic mobility is contributing a bit. I’ll buy that, but the rest just don’t hold up that well to scrutiny.

      2. What does the cross-industry or cross-occupation variance in wages look like over time? I don’t know, but it’s an interesting question. The economy as a whole has been doing badly, in part due to supply-side factors, so there aren’t many “exploding” industries. But North Dakota provides one example.

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