Why China Trade Hit U.S. Workers Unexpectedly Hard

A growing body of academic research shows as import competition surged, the U.S. labor force itself was becoming less adaptable

By Jon Hilsenrath and Bob Davis

Container trucks leave the Port of Shanghai's Wusongkou area. A 2016 paper found that adjustments in U.S. labor markets to China trade were unusually slow, with wages and labor-force participation rates remaining depressed and unemployment rates elevated for at least a decade after the China trade shock hit. Photo: JOHANNES EISELE/AFP/Getty Images)

A growing body of academic research shows the U.S. workforce was hit harder than expected by trade with China and was potentially unprepared for the shock. As import competition surged and displaced manufacturing workers, the U.S. labor force itself was becoming less adaptable, and political blowback was brewing.

Here is a summary of some of the most important new research in these areas:

Less Flexible Labor Markets

U.S. workers and firms have long been known among scholars and policy makers for being flexible and able to adapt to shocks and changes in the economy.

But some researchers suggest that labor markets have become less dynamic since 2000, and even more so since 2007, making them less adaptable just as the shock of trade with China hit and then worsened.

1. In “Understanding Declining Fluidity in the U.S. Labor Market,” written in March 2016, Raven Molloy, Christopher Smith, Riccardo Trezzi and Abigail Wozniak document declining dynamism in the job market. That means fewer people switching jobs, moving in and out of the labor force and moving from one state to another, and fewer companies creating and extinguishing positions.

The Fed analysts say the trend dates back to the early 1980s. Their measure of fluidity has dropped 10% to 15% since then. This is partly due to an aging population and two-worker families keeping people in place.

The trend also might be associated with fraying social fabric in communities. States with large decreases in the fraction of the population who report that strangers can be trusted tend to have large declines in labor market fluidity.

In other words, job searches and hires might be getting tangled up because people don’t trust each other. Workers also are renegotiating wages less often.

2. In “Labor Market Fluidity and Economic Performance,” delivered at the Federal Reserve’s Jackson Hole, Wyo., conference in August 2014, economists Steven Davis and John Haltiwanger find a shift away from young firms that create new jobs.

Firms no more than five years old accounted for 19% of employment in 1982, and then 14% in 2000 and 11% in 2011. In the 1980s and 1990s, the drop was dominated by young retail firms, likely being squeezed by big-box retailers.

After 2000, there was a switch: a large decline in high-tech startups. Those “young, entrepreneurial firms…were a major source of innovation and productivity growth for the economy as a whole in the 1980s and 1990s,” the economists said.

They found that lost labor-market dynamism has been hardest on younger and less-educated workers. The economists say regulations, including occupational-licensing rules and worker protections meant to prevent discrimination based on age, gender, race and religion, contribute to less-dynamic labor markets.

3. In “The Secular Decline in Business Dynamism in the U.S.,” from June 2014, Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda find that firms have become less responsive to outside shocks. “This has potentially adverse effects on industry-level productivity growth since there has been a slowdown in the pace at which resources are being reallocated from low- to high-productivity businesses,” they wrote.

4. In “Locate Your Nearest Exit: Mass Layoffs and Local Labor Market Response,” September 2015, authors Andrew Foote, Michael Grosz and Ann Stevens look at how workers respond to mass layoff events.

Since the Great Recession, a greater number of people have tended to drop out of the labor force in response to mass layoffs, while fewer people have moved to other places in search of new jobs, the researchers concluded.

Moreover, the percentage of the population that moved in response to mass layoffs in search of better jobs declined after the recession.

5. Kerwin Kofi Charles, Erik Hurst and Matthew Notowidigdo, in “The Masking of the Decline in Manufacturing,” find that the decline in U.S. manufacturing led to a reduction in demand for less-educated workers between 2000 and 2006.

For a few years, the housing boom masked the effects of the manufacturing decline for less-educated workers as men found jobs in construction. But when the housing market collapsed in 2007, there was a large, immediate decline in employment among such workers, who faced the sudden disappearance of jobs related to the housing boom and the fact that manufacturing’s steady decline in the early 2000s left them with many fewer opportunities in that sector than at the start of the decade.

China Shock

The shock of trade with China was different than the shock of U.S. trade with other countries such as Mexico, Japan and Asian “tiger” economies such as Taiwan and Hong Kong, research shows. The scale of import competition from China was immense, dislocating millions of U.S. manufacturing workers, who had trouble adjusting and finding new work.

1. In “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” in February 2016, authors David Autor, David Dorn and Gordon Hanson find that adjustments in local labor markets to China trade were unusually slow, with wages and labor-force participation rates remaining depressed and unemployment rates elevated for at least a decade after the China trade shock hit.

Exposed workers experience more job churning, reduced lifetime incomes and more dependence on disability benefits and other government assistance.

2. In “Important Competition and the Great U.S. Employment Sag of the 2000s,” August 2014, authors Daron Acemoglu, David Autor, David Dorn, Gordon Hanson and Brendan Price find that import competition from China between 1999 and 2011 led to an employment reduction of 2.4 million workers.

The decline came in industries directly hit by competition and among their suppliers and neighboring firms.

3. In “Trade Adjustment: Worker Level Evidence,” December 2014, authors David Autor, David Dorn, Gordon Hanson and Jae Song find that earnings losses for people exposed to trade with China are larger for people with low initial wages, low initial tenure and low attachment to the labor force.

Low-wage workers churn primarily among manufacturing sectors, where they are repeatedly exposed to subsequent trade shocks. High-wage workers are better able to move across employers with minimal earnings losses and are more likely to move out of manufacturing.

4. In “The Surprisingly Swift Decline of U.S. Manufacturing Employment,” April 2014, Justin Pierce and Peter Schott find a connection between U.S. manufacturing declines and China’s admission to the World Trade Organization in 2001. China’s accession to the WTO removed an uncertainty about tariff levels, increasing the incentive of firms to invest in China for export.

Political Blowback

The shock of trade with China also has had political repercussions. Those include polarizing congressional districts, increasing voter turnout and possibly helping Democrats.

1. In “Importing Political Polarization?,” April 2016, authors David Autor, David Dorn, Gordon Hanson and Kaveh Majlesi find that congressional districts most exposed to trade with China tended to remove moderate representatives from office in the 2000s and replace them with either more liberal Democrats or more conservative Republicans.

Voting also took place along racial lines. Districts with white populations tended to replace moderates with conservative Republicans, and districts with nonwhites tended to replace moderates with liberal Democrats.

2. In “Does Trade Liberalization with China Influence U.S. Elections?” April 2016, authors Yi Che, Yi Lu, Justin Pierce, Peter Schott and Zhigang Tao find that counties subject to greater competition from China tend to vote more often for Democrats and experience greater voter turnout.

In the past, Democrats benefited from taking positions that restrict trade and offer assistance to people exposed to trade shocks.

The researchers’ analysis didn’t include the results of the 2016 presidential primaries, which resulted in Donald Trump as the Republican presidential nominee. Mr. Trump has taken tough-on-trade positions.

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