Monday, February 27, 2017
Trump was right: China ate America's manufacturing jobs.
Freakonomics podcast featuring labor economist David Autor:
- Between 1991 and 2013, Chinese exports grew from roughly 2 percent of the world’s total to nearly 20 percent.
- ...There are two big differences of the last two decades relative to earlier periods. One is that a lot of our trade prior to China’s rise, a lot of it was North-North trade. You know, trading between wealthy nations. So you know, we sell aircraft engines to France and we buy cheese and wine and Renaults or maybe we buy Mercedes from Germany. And so it’s a lot of high-skill people trading high-skill goods and we’re trading on the basis of taste. Like, “I like your vehicles. You like my aircraft.” It’s not trying to see who can make the cheapest version of X, Y, or Z. We’re often focusing on a set of expensive goods in which we all are differently good at different subsets.
- So when the United States trades with the developing world, we’re going to typically export skill-intensive products: aircraft engines, electronics, movies, and TV programs and things that use a lot of highly educated labor. And we’re going to tend to import low-skilled or what we call labor-intensive products like you know footwear and textiles, leather goods, things that require a lot of hand assembly.
- TRADE BENEFITS US SKILLED WORKERS AND CONSUMERS: And so what does that do? Well, when we export those high skill-intensive goods we’re basically raising demand for skilled or educated workers in the United States. When we import those labor-intensive goods, we’re going to reduce demand for blue-collar workers, who are not doing skill-intensive production. Now we benefit because we get lower prices on the goods we consume and we sell the things that we’re good at making at a higher price to the world. So that raises GDP but simultaneously it tends to make high-skilled and highly educated labor better off, raise their wages, and it tends to make low-skilled manually intensive laborers worse off because there is less demand for their services – so there’s going to be fewer of them employed or they’re going to be employed at lower wages. So the net effect you can show analytically is going to be positive.
- BUT HARMS U.S. UNSKILLED LABOR: But the redistributional consequences are, many of us would view that as adverse because we would rather redistribute from rich to poor than poor to rich. And trade is kind of working in the redistributing from poor to rich direction in the United States. The scale of benefits and harms are rather incommensurate. So for individuals, you know, I have less expensive consumer items because of imports from China. But it hasn’t affected my employment or my wages. For many others – on the order of at least a million U.S. manufacturing workers – it meant the end of their jobs and in many cases the end of their industries.
BOTTOM LINE: Trade helped U.S. skilled workers (by increasing demand for their services) and consumers (by giving consumers cheaper goods), but hurt U.S. unskilled workers (by reducing demand for their services). In a frictionless world, they would move to their next best alternative (e.g., Texas or Tennessee), but instead they are moved out of the labor force and into the safety net (e.g., medicare, medicaid, early retirement, disability insurance, food stamps, and TANF).
Interesting closing thoughts by David Autor, which seems to echo President Trump's campaign:
I think the other thing that we have to recognize, and that economists have tended not to emphasize is that jobs aren’t purely income. They are part of identity. They structure people’s lives. They give them a purpose and a social community and a sense of relevance in the world. And I think that is a lot of the frustration that we see in manufacturing-intensive areas. We saw a lot of that actually in the recent election. People feel like their place in the universe, or at least in the economy, has really been kind of reduced, made less valuable. And I think that that’s costly even beyond the direct financial costs.
There are so many good points in this short, yet powerful blog. It’s not so much that China ate America’s manufacturing jobs, but more like America willingly gave them away. Is it possible we walked into these trade agreements thinking about the low cost of tradeable labor-intensive goods, giving no thought to what that would do to our own labor forces? Business trade often happens with management looking over the reports and figures, completing enthralled by the bottom line. This sort of trade may be beneficial to the skilled, educated labor force, but it cuts down on the need for the uneducated part of our labor force.
ReplyDeleteEvery labor force needs a balance between skilled and unskilled workers to complete production tasks. This may be the piece that gets forgotten when management is looking at profit margins. People are not just skilled and unskilled; people have pride and identity that come along with what they can accomplish in the work force. All parts of human capital should be taken into consideration and treated as our best assets. We cannot expect our unskilled labor force to live on less than adequate pay due to the lack of demand for them that trade has created. Unfortunately, many have no choice but to turn to government assistance for medical, housing, and food needs. So, government has helped create the trade that makes the skilled workers richer and the unskilled workers more dependent on government services. What sense does this make?
It’s a fallacy to think that exporting blue collar jobs won’t impact individuals, but even more so the market. Having exported these jobs through both government and industrial decision-making, what the US is left with is a workforce that must be highly educated (since most living wage paying less-educated positions are now in other countries). Look at this blog (https://managerialecon.blogspot.com/2017/11/why-are-you-paying-so-much-in-tuition.html?showComment=1510878634358#c599744614586226199) on college tuition to see how subsidizing these educations has impacted students in the US, and at least some of the real reason for these rising costs. When you put these together and consider the bottom line, it boils down to this: we have fewer unskilled workers. Those we do have may have huge debt load from attempting to or attaining higher education. This explains why so many people are working more than one job; the jobs available pay less than they need to meet their debt load. Even worse, many of these people are the displaced workers who used to hold highly paid unskilled labor jobs, and now juggle multiple jobs with children or in hopes of being able to do some retirement saving. Government intervention in the market has served to create a larger, not smaller, gap between the wealthy and the poor, eroding our middle class.
ReplyDeleteIs it really a surprise that American corporations look to overseas options to decrease their manufacturing costs? If outsourcing your manufacturing to an overseas entity in addition to shipping the products back to the USA is less expensive than manufacturing the items in the USA isn’t that a good business decision? Businesses are set up to make a profit and in the world of public companies return a profit to their shareholders. Organizations need to factor in increasing marginal costs in their projections to set a price. As marginal costs increase so will the average costs to create the product which will affect a companies break even price. When increasing marginal costs occur it is implied that diminishing marginal productivity is occurring. If more inputs are needed to create excess units of output, then the marginal costs increases.
ReplyDeletePutting politics aside the responsible option is making the competitive landscape in America more competitive. Lowering the operational costs of companies in America through a lower corporate tax rate will make conducting all aspects of their business on American soil a viable option instead of looking overseas. Business is the greatest job provider in our country and we have an obligation to make sure that businesses can succeed. When businesses succeed America succeeds because more people are working and providing for their families.
It was no secret that China was as well as other countries were hurting manufacturing in America. You don’t have to like President Trump to understand that when companies move their manufacturing oversees American jobs decrease. Think about the economics of a manufacturing plant. Company XYZ opens a manufacturing plant in Ohio. Now you have workers traveling to work each day. An economy is formed around this plant to facilitate their needs from gas stations to restaurants. When there are more people working there are more people spending money and a need for goods and services near the manufacturing plant. The one thing I never understood was why do we fight so much about treating businesses well? To many people look at businesses as a bad thing. Businesses are the greatest provider of jobs and we need to make sure they are able to operate so we have a strong job market and people can provide for their families.
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