The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade

Abstract

China's emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. Better understanding when and where trade is costly, and how and why it may be beneficial, are key items on the research agenda for trade and labor economists.

The Drivers of Income Inequality in Rich Countries

“…In their widely cited paper on the impact of trade with China on different industries and plants, local labour markets and individual workers in the United States, Autor et al . () find that adjustment in local labour markets is remarkably slow, wages and labour force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the ‘China shock’, exposed workers experience greater job churning and reduced lifetime income . However, the large and long‐lasting adverse effects on local economies detected by Autor and co‐authors are still consistent with the general assertion that trade plays only a minor role in the shrinking size of US manufacturing.…”

Income Inequality and the Persistence of Racial Economic Disparities

“…These include the decline of the labor movement (Western and Rosenfeld 2011), lower minimum wages (DiNardo, Fortin, and Lemieux 1996;Lee 1999), decreasing enforcement of antitrust laws (Comanor and Smiley 1975;Khan and Vaheesan 2016), the lowering of trade barriers (Alderson and Nielsen 2002;Autor, Dorn, and Hanson 2016), and reductions in top income tax rates (Piketty, Saez, and Stantcheva 2014). Each of these policies was a departure from the institutional framework of the mid-twentieth century, and many were actively pursued by organized interest groups starting in the 1970s, which is exactly when income inequality began to rise (Hacker and Pierson 2010).…”

Populism, Fairness and Competition: Should We Care and What Could We Do?

“…First, if the supply of labour is not elastic, non‐compete clauses have the potential to make collusion among employers easier and profitable and to drive a wedge between the value of a worker's marginal product and the wage. In relation to this hypothesis, they point out that the current study of local geographic labour markets suggests that demand shocks due to increased imports (Autor et al ., ) or the introduction of robots (Acemoglu and Restrepo, ) also lead to changes in wage rates, which is not consistent with highly elastic labour supply.…”