The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade

45 Pages Posted: 21 Apr 2016

See all articles by David H. Autor

David H. Autor

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

David Dorn

University of Zurich - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Gordon H. Hanson

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS); National Bureau of Economic Research (NBER)

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Date Written: March 23, 2016

Abstract

China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has toppled much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside its heralded consumer benefits, trade has both significant distributional costs, which theory has long recognized, and substantial adjustment costs, which the literature has tended to downplay. These adjustment costs mean that trade impacts are most visible not in national-level outcomes for broad skill types, as canonical theory would suggest, but in the local labor markets in which the industries most exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and local labor-force participation rates remaining depressed, local unemployment rates remaining elevated, and public transfer benefits take-up rising across a spectrum of programs for at least a full decade after trade shocks commence. Within impacted localities, workers most affected by rising trade exposure are those initially employed in firms that compete most directly with China. Exposed workers experience greater job churning and reduced lifetime income, with the largest adverse effects among initially low earners. Recent literature also addresses the aggregation of local-level impacts of trade shocks into national-level outcomes. Employment has fallen in U.S. industries more exposed to import competition, as expected. So too has overall employment in the local labor markets in which these industries were concentrated. Offsetting employment gains in non-tradables, export-oriented tradables, or imported-input-using industries have yet to materialize. Better understanding when and where trade is costly, and how and why it may be beneficial, are key items on the research agenda for trade and labor economists.

Keywords: trade flows, labor demand, earnings, job mobility, China

Suggested Citation

Autor, David H. and Dorn, David and Hanson, Gordon H., The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade (March 23, 2016). CESifo Working Paper Series No. 5825. Available at SSRN: https://ssrn.com/abstract=2767373

David H. Autor

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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David Dorn (Contact Author)

University of Zurich - Department of Economics ( email )

Zürich
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Germany

Gordon H. Hanson

University of California, San Diego (UCSD) - Graduate School of International Relations and Pacific Studies (IRPS) ( email )

9500 Gilman Drive
La Jolla, CA 92093-0519
United States

National Bureau of Economic Research (NBER)

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United States

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