In theory, trade is good. In practice, considerable debate exists on whether importing foreign goods has an adverse effect on the domestic economy (and on the labor market in particular). The impact of this effect depends on whether foreign goods compete with or complement local production.
For example, if imported computers can easily substitute for domestically produced computers, then the domestic production of computers and employment in the computer and electronics industries will most likely fall with an increase in imports. On the other hand, if computers are used as inputs to produce other domestic goods, like bank services, local production costs of banking services will be lower with cheaper computers, and, all else equal, domestic production and employment will likely rise in the banking industry.
In the working paper, The Impact of Trade on Labor Market Dynamics, which I co-authored with Lorenzo Caliendo and Fernando Parro, we studied the effects of an increase in imports from China on U.S. labor markets.
Our model accounted for the way that foreign goods can displace or complement U.S. production. We looked at state-level data on 22 industries in the U.S., ranging from manufacturing to services. Specifically, our model accounted for:
How the outputs of one industry are used as the inputs in another
- The costs of moving goods across space, either across countries or across regions within a country
- The costs workers face when they switch from one industry to another or when they move from one state to another.
Our results indicate that although exposure to import competition from China reduces manufacturing employment, aggregate U.S. welfare increases. Disaggregate effects on employment and welfare across regions, sectors, and labor markets, and over time are shaped by all the mechanisms and ingredients mentioned previously.
Chosen excerpts by Job Market Monitor. Read the whole story at How International Trade Affects the U.S. Labor Market.