How to Deal With Globalization's Job Losses

While government transfers cushion the blow of job loss, they are not designed to help workers transition to a new job.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

I continue to think that most of the excess unemployment in the wake of the Great Recession reflects inadequate demand for goods and services and an economic recovery that is slower than it needs to be, rather than a " new normal" for the labor market marked by high structural unemployment. That said, the persistence of long-term unemployment has heightened our awareness that U.S. policies are inadequate for helping workers adjust to losing jobs that will never come back. Addressing that inadequacy is critical for enabling us to compete in a fast-changing global economy and achieve broad-based prosperity.

Globalization and technological change remain important contributors to long-run increases in U.S. living standards. But what's good for the average American is not necessarily good for every American. In fact, the gains from trade and technology tend to be quite diffuse. The losses, in contrast—while usually smaller than the gains in aggregate—tend to concentrate among particular workers, firms, and communities.

[ See a collection of political cartoons on the economy.]

In the ideal world of the economic classroom, this is not a problem. Workers move quickly from contracting sectors to expanding sectors, and the political system figures out how to transfer some of the gains from the winners to the losers so that no one ends up worse off in the end. But, new research by economists David Autor, David Dorn, and Gordon Hanson (described here) shows how different things can be in the real world.

Autor, Dorn, and Hansen look at the economic impact of low-cost imports from China. They do not address the question of how much consumers in general gain from lower cost goods; instead, they focus on the concentrated impact of those imports in local areas. Along with the expected finding that import competition from China causes declines in manufacturing jobs in affected areas, they also find, more surprisingly, "a decline in wages that is primarily observed outside of the manufacturing sector," and "a steep drop in the average earnings of households." 

Furthermore, they find that these losses are tied to increases in government transfers. The largest component is federal disability, retirement, and in-kind medical assistance, suggesting that job dislocation caused by trade prompts older workers to retire early or go on disability. Unemployment insurance and other income assistance play a smaller role, and the program directly designed to address displacement due to trade shocks (Trade Adjustment Assistance) accounts for a negligible amount of the increase largely because its funding is so small.

[ Read the U.S. News debate: Should Congress Extend Federal Unemployment Benefits? ]

While government transfers cushion the blow of job loss, they (other than Trade Adjustment Assistance) are not designed to help workers transition to a new job. As Autor says about the implication of his findings, "We could have much better adjustment assistance—programs that are less fragmented, and less stingy." 

These results cover the period 1990-2007 and are not affected by the surge in unemployment relative to job openings caused by the Great Recession. Adjustment assistance for dislocated workers serves a different purpose from unemployment insurance, and policymakers should not view it as a substitute. Unemployment insurance's financial assistance plays a critical role in helping workers support themselves while they look for new work, especially in a weak labor market, and policies to help workers transition to new jobs should not come at the expense of unemployment insuance. Adjustment assistance and training are, however, valuable complements to unemployment insurance—and we are not doing enough in that area.

While some may quarrel with their specific proposal, economists Robert Lawrence and Matthew Slaughter make an important point when they argue that policymakers should not confine adjustment assistance to job losses associated with international trade:

Workers today face continual adjustment as new technologies and competitors, both domestic and foreign, render their talents and skills obsolete. Indeed, the premise that job losses can be attributed to precise causes is archaic, given the linkages among international trade and investment and technological change.

[ See a slide show of Mort Zuckerman's 5 Ways to Create More Jobs.]

Adjustment assistance is about trying to move workers to jobs. But, maybe it's more efficient to move jobs to workers. That's Mark Thoma's thought when he looks at the Autor, et al. research, even though he is very wary of policies aimed at picking winners and losers.

Promoting a strong economic recovery is job No. 1 for policymakers. But finding better ways to help workers adjust to permanent job losses should be part of a longer-term strategy for competing successfully in a dynamic global market.