Friday, February 26, 2010

Free Trade Is Not A Job Killer

A recent debate elsewhere interested me enough to do some research on the effects trade has on goods producing employment in the US. Now, I want to state upfront that this is a look at the aggregate and that there are obviously anecdotal cases of individual companies/plants moving to overseas locations for competitive reasons, however, I want to separate the publicized and emotional loss of individual plants from the broad case that free trade is a job killer.

As we all know, the trade deficit has ballooned in recent decades as is evidenced by the following graph (all graphs are thumbnails due to the quantity in this piece):
We can clearly see that really beginning for good at the end of the 1991 recession the trade balance went down dramatically, with the only sustained recoveries occurring during recessions. So, let's look at how goods producing employees have been affected by this trade deficit by decade.

The trade deficit really got its start during the early 80's recessions when high interest rates by the Fed created a strong dollar really hurt exports causing their nominal dollar value to flat line from 1981 through 1986 before they took off again in 1987. The following graph shows goods employment vs. the trade deficit for the 80s:
This graph shows no link between the increasing trade deficit and goods employment in the 80s with goods employment rebounding even while the deficit grew following the end of the 81 recession.

Next up are the 90s; the decade of grunge, the stock market bubble, and NAFTA. One would expect to see massive declines in goods employment following the implementation of NAFTA and a ballooning trade deficit towards the end of the decade, but as you can see by the following graph the opposite actually occurred. Following goods jobs reaching their post-recession trough (the first jobless recovery) in late 1992, the exploded up 10% from that bottom at the same time that the trade deficit went from essentially -$18 billion to over -$90 billion.

Now let us move on to our most recent decade; where trade with China exploded, we endured two recessions (both with jobless recoveries), and an enormous increase in national debt. AS you can see from the following graph, the goods employment trough didn't occur until about 2 years after the first recession ended, which also coincided with a huge increase in the trade deficit, yet once again goods jobs held their own during the massive trade imbalance.
Then, during the most recent recession, goods jobs dropped like a rock (down nearly 20% from the pre-recession peak) and yet the trade deficit actually decreased (and yes, oil was a part of this, but it has also been a big part of our trade deficit all along.

So then, what does can account for our decline in goods employment over recent years, especially over the last decade where it really dropped off a cliff? The most simple answer seems to be that our productivity has reached a point where it can outstrip production demands, which leads to a decline in the labor intensity needed for goods production.
Let's examine this a bit further. From the end of the 1990 recession to the pre-2001 recession peaks productivity was up about 47%, industrial production was up about 61%, and goods employment was up about 9.3% (I used the end of 1990 recession value and not the trough in actual goods employment here). So during the 90s, production outstripped productivity (although both were up a ton), while job creation came in at only +9.3%, obviously lagging. However, from their 2001 recession troughs (again using the end of the recession for jobs), productivity was up about 25%, industrial production was up about 15%, and jobs declined by about 4.3%. This graph demonstrates that when productivity outstrips production goods jobs decline, but that even when production outstrips productivity job growth can be anemic so long as the productivity growth is still substantial. The current recession is showcasing productivity's effects on jobs very well, as while production has dropped about 13% during this recession, productivity is actually up over 5%, and industrial production is now at it's 2002 levels, but with roughly 20% fewer workers making those goods.

In conclusion, the data appear to show that the real factor in goods job creation (or loss) is the relationship between productivity and production, which unfortunately leaves little room for protectionism (even sans the trade war implications that would create), as unless productivity falls precipitously we would see no net job creation from any such endeavor.

And just so we don't define this as a US problem, I will direct you to a conference board study that highlights China's loss of manufacturing jobs to productivity too.