Free-trade theory has a growing number of detractors, and one of their traditional concerns has understandably moved to center stage in this presidential election year: How much has the exporting of jobs to foreign nations contributed to the lack of jobs and the absence of wage growth in the current expansion at home?
The standard tenets of free-trade theory strongly support the case for outsourcing. Generally, as business finds cheaper ways to make products, it reduces prices to consumers. And some businesses may not survive unless they can reduce labor costs.
PHOTO: REUTERS
In general, most economists believe that the "consumer surplus" that results from lower prices far outweighs the cost of lost jobs or lower wages. In other words, there are many more winners than losers.
But recent research suggests that the magnitude of this advantage has been exaggerated. Also, the plight of the losers has clearly been sorely neglected in the economic literature.
And if sending jobs abroad turns from its current relative trickle to a fast-flowing stream, as it well might, the costs of job dislocation will be still higher.
It is more than a little interesting how frequently past research understated the costs of jobs lost to free trade. A literature search published in a 2003 monograph by the economists Michael Klein, Scott Schuh and Robert Triest, called Job Creation, Job Destruction and International Competition (Upjohn Institute), provides a useful summary of this work.
A 1972 study by Stephen Magee, for example, toted up the welfare benefits of trade and set them against the costs of unemployment. The study purportedly showed that the benefits of hypothetically eliminating all trade restrictions outweighed the costs of unemployment induced by international competition by a factor of 100 to 1.
It is hard to argue with such a lopsided benefit. But Klein, Schuh and Triest note that Magee neglected key costs of job dislocation, like the likelihood of displaced workers being paid a lower wage when they got new jobs. A 1980 study took into account more job dislocation costs, but found that benefits from a 50 percent cut in global tariffs still exceeded dislocation costs by a factor of 20 to 1. Such results understandably led economists to neglect the costs of job dislocation.
The 1980 adjustments were still not nearly enough, however, Klein, Schuh and Triest argue. The main reason is that such early studies assumed that net changes in jobs -- the difference between those destroyed and those created -- were a good proxy for those who suffered from job dislocations. But in fact, many more jobs are destroyed and created in the US than is immediately apparent.
For example, the authors find that in a large sample of manufacturers, 1.3 jobs per 100 were lost on balance each year between 1973 and 1993. But 10.2 jobs per 100 were destroyed, while 8.8 were created. (The discrepancy is a result of rounding.)
Such a high rate of job destruction carries serious costs for workers, even when they eventually find new jobs. There are long periods of unemployment, retraining costs and costs of searching for a job. And the new jobs usually pay less than the old ones. In the meantime, skills are lost as well.
The authors estimate that if some of these costs of job dislocation were taken into account, the benefits of trade would outweigh the costs by a far smaller margin. For example, the margin in the 1980 study would be reduced from 20 to 1 to only 2 to 1.
The authors remain advocates of free trade; a benefit of 2 to 1 is still hefty. But the findings suggest at the very least that a sizable number of workers are inevitably hurt by free trade.
Are protective tariffs an answer? One valuable contribution of Klein, Schuh and Triest is to show that job losses are rarely if ever uniform in an industry. As a consequence, tariffs may often be too broad a policy tool because they will protect companies that would not fire workers anyway.
Moreover, trade and exporting jobs are not the only sources of dislocation. Technological changes that may rapidly make existing products obsolete have the same consequences. Klein, a professor at Tufts University, says a better policy is to make unemployment insurance more generous. He adds that portability of corporate benefits like pensions and health insurance would also more directly address some costs of job dislocation.
Other economists are beginning to think about policies that efficiently compensate those who lose jobs for the costs of dislocation. Carl Davidson and Steven Matusz, in a monograph called International Trade and Labor Markets (Upjohn Institute), also argue that such policies must not sweep across industries and the labor force. They favor wage and employment subsidies over broader measures.
Such an analysis by no means tells us everything we have to know about free trade and outsourcing. On the one hand, the benefits of free trade are not necessarily limited to the consumer surplus. For example, to the extent that free trade expands markets, as even Adam Smith might have argued, it stimulates productivity growth because it makes possible enormous economies of scale in manufacturing, services and marketing, and enhances competition.
On the other hand, keeping domestic wages high adds to the demand that can generate productivity gains. Moreover, the basic tenets of free trade assume that the economy is operating at full employment -- in other words, almost everyone who wants a job can find one. Not enough research has been done on the trade effects in an economy with persistent unemployment, which has characterized most of the past 30 years.
What is entirely clear, however, is that the losers from free trade require more of the nation's attention. And their numbers are growing as trade and job migration expand.
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