Breathing down my neck
Here Be Dragons
It can be pretty exciting, when a dragon finally stirs, but beware of getting singed. And singed many got, in particular manufacturing workers around the world, when China opened up and burst into international trade. A new CESifo Working Paper by CESifo researchers David Dorn and Gordon Hanson, and their colleagues David Autor and Jae Song, explores the effects of China’s coming-out on earnings and employment of US workers. It is the 5,000th paper in the CESifo Working Paper series.
China’s new role in global trade has provided a rare opportunity to examine how workers adjust to trade shocks. The country’ spectacular export growth and its irruption into the global production networks has represented a substantial competitive shock for US manufacturing, a sector that still accounts for the majority of US trade. As Chinese imports to the United States surged, US manufacturing employment suffered a historic contraction, with the trend that had started in the 1980s accelerating sharply in the 2000s. The number of workers employed in US manufacturing fell by 9.7 percentage points between 1991 and 2001 and by a further 16.1 percentage points between 2001 and 2007.
The authors set out to examine how exposure to rising competition from China affects the employment and earnings trajectories of US workers over the medium to long run. Using individual-level data, they estimated the impact of exposure to Chinese imports on cumulative earnings, employment, movement across sectors, movement across regions, and receipt of Social Security benefits over the period 1992-2007.
China’s growth over the period was driven by rapid improvements in industrial production resulting from its transition to a more market-oriented economy, which was accompanied by rising total factor productivity, capital accumulation, migration to urban areas and better infrastructure. It paid off: over the period 1998 to 2007, China accounted for no less than three-quarters of worldwide growth in manufacturing value added that occurred in low- and middle-income nations.
Much research has dealt with the resulting impacts, but it has mostly focused on aggregate market level reactions. Our authors concentrate on the adjustments at the worker level, quantifying the distribution of incidence among four margins: the change in earnings at the initial employer (intensive margin), in earnings associated with job loss (extensive margin), in earnings associated with receipt of government benefits (transfer margin), and in earnings associated with moving between employers, industries or regions (relocation margin).
They find that workers more exposed to trade with China exhibit lower cumulative earnings and employment, lower earnings per year worked, and higher reliance on Social Security benefits over the sample period. The difference between workers at the 75th percentile of industry trade exposure and those at the 25th percentile amounts to cumulative earnings reductions of 46% of initial yearly income.
Exposure also increases job churning across firms, industries, and sectors. More exposed workers spend less time working for their initial employer, less time working in their initial industry, and more time working elsewhere in manufacturing and outside manufacturing altogether.
Workers with lower earnings and shorter tenure are particularly affected, incurring larger losses in subsequent earnings and employment, while those with high initial earnings are affected only modestly. Worse, low-wage workers churn primarily among manufacturing industries, where they remain exposed to trade shocks. The authors find little evidence that geographic mobility is an important mechanism through which trade adjustment operates: the flow of labour across US cities and states following changes in regional labour demand appears sluggish and incomplete. High-wage workers primarily offset losses at their initial firm by moving out of manufacturing altogether.
But it is still true that China is an active participant in global production networks, its exports using inputs produced in other developing and industrialised countries. The dragon takes, but it also gives. Small consolation for those manufacturing workers that got singed—and will stay singed.