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Trade, Job Losses, and Comparable Wages

One of the frequent objections posted by those who are concerned about free trade is that it leads to job losses. This is true. However, saying that free trade causes job losses does not tell us very much. In this post I will try to put trade job losses in context, and then examine what is probably the more important policy question—what to do for those who lose their jobs to trade?

As Ryan Young and I note in “Traders of the Lost Ark,” of the 5.6 million net manufacturing jobs lost between 2000 and 2010, only 13.4% (or 750,000) were due to trade effects—about 75,000 a year. To put that into context, in December 2018 alone, 5.5 million people left their jobs as part of the normal churn and turnover of the economy. Even taking manufacturing firings alone, 110,000 jobs were lost that month. Free trade’s negative effects on employment are barely noticeable.

Of course, if you are someone who loses her job to foreign competition the effects will be very obvious. That does not necessarily mean you are in a worse position than your neighbor who lost her job because of a domestic technological change in her industry.

So the question then becomes—how can the laid-off worker find a comparable job that pays a living wage? According to MIT researchers, the “living wage” for a family of four (two working adults and two children) is $16.14 an hour. A typical manufacturing job pays more – around $22 an hour at current rates (which have increased over the past few years).

As Kevin Williamson noted recently in National Review, the much-derided fulfillment centers of large warehousing enterprises pay eighteen to twenty dollars an hour. Not as much as a manufacturing job, but above the living wage, and they are often located in areas where the actual living wage is lower than the national average. As Williamson says, the myth of “good factory jobs” downplays the reality that they were often hard and unrewarding:

These modern blue-collar jobs at Amazon — and in the back end of the rest of the high-tech world, from guys doing the maintenance at Google’s server farms to guys driving forklifts in the warehouses of high-tech midwestern chemical companies — aren’t really all that different from the factory jobs our fathers and grandfathers worked back during the so-called golden age of American manufacturing...

The nature of work in America is changing. A blue-collar job is just as likely to take place in a large building as before, but the job may well involve moving stuff around rather than putting stuff together. Similarly, the nature of compensation is changing. Hourly pay might not encompass all the value of the compensation package—an $18 an hour job with benefits from day one may easily be worth more to the worker than a $22 an hour job without benefits.

So jobs in fulfillment may well be part of the answer to the “comparable job” issue. However, another answer presents itself in jobs the newly laid-off worker will not be able to get immediately.

Occupational licensing has spread like wildfire across occupations in the U.S. According to the Institute for Justice, 20 percent of all jobs in America now require an occupational license of some sort. A newly laid-off worker is unlikely to have the necessary licenses to work in one of these jobs, meaning that they either face significant costs in obtaining a license or instead settle for a lower-paying job.

The difference in compensation between a licensed job and an unlicensed one is significant. According to the Brookings Institution, “Workers with licenses earn considerably more than those without: $18.80 per hour for the median unlicensed worker versus $25.00 for the median licensed worker.” For the laid-off $22-an-hour worker, a comparable job could be within reach, were it not for licensing requirements.

Finally, there is the issue of location. Often the comparable jobs are not within easy commuting distance. In previous generations, the worker would have moved his or her family to where the jobs are. Yet geographic mobility in the labor force has been in decline since the 1980s. There are many different theories as to why this should be, yet it seems palpable that policies that encourage people to “stay put” cannot help. These include long-term unemployment insurance policies and trade adjustment assistance payments, as well as less obvious policies such as those that encourage people to invest in real estate rather than other investments (thereby tying people to their house to ride out a downturn in values).

For the policy-maker, the appropriate question for jobs and trade is not, “How can I prevent trade causing job losses?”—to which the answer is all too often job-destroying tariffs—but “How can I help the laid off worker find a new job?” The answers to that question are many, but they include:

  • Allow new industries to create new forms of well-paid work without undue regulatory restriction
  • Reduce the burdens of occupational licensing
  • Reconsider the perverse incentives of well-meaning policies that may discourage labor force mobility

Thinking about the question this way will also have one other effect. It will allow the debate about trade to concentrate on the manifest benefits of trade rather than on its illusory costs.