Estimating Employment Adjustment Costs of Trade Liberalization

This paper reviews methods used to estimate and account for labor adjustment costs from trade changes. While there is conflicting evidence from ex‐poststudies as to how difficult it is for labor to adjust to changesin trade, ex‐ante studies find that adjustment costs may be large and they may vary widely depending on several factors, e.g., skill, experience, sector. For example, Autor, Dorn, and Hanson (2013) find that the increase in U.S. imports from China during 1992 to 2007 lowered earnings and employment of workers in competing industries and increased the use of social security disability insurance. They also find that high‐wage workerstended to move outside the industrialsector during this period and therefore had less noticeable declines in earnings. Stone, Sourdin, and Legendre (2013), however, find that there is no consistent evidence of large or systematically difficult adjustment by labor for trade, by examining labor force surveysfor Brazil, Canada, Israel, South Africa, UK, and the United States. They find that occupational effects are greater than industry effects and that workers may benefit or be hurt by the increased trade. We first review results from ex‐poststudies of labor adjustment. Then we examine how labor adjustments are typically measured in ex‐ante simulations. Next, we review several approaches estimating labor adjustment costs. Lastly, we use a GTAP model which utilizes expanded statistics for U.S. labor markets to analyze various trade scenarios and under different labor market conditions. We find that reducing substitutability between labor in different occupations and different sectors leads to a decline in export growth, but a larger welfare gain from global trade liberalization. We also plan to analyze worker movements across occupations and sectors in the alternative scenarios and will also examine two to three additional scenarios.