Impact of Globalization on Worker Outcomes
What's Up In Economics
By Joe Maginnis
A recent article published by Sharon Traiberman in the December edition of the American Economics Review studied the impact of trade competition on employment at the occupational level vs. the firm/industry level. Prior research on the impact of globalization has primarily focused on firm/industry-wide reallocation while ignoring the short-run costs of destroyed human capital at the occupational level.
Important Definitions
Occupation: A set of activities or tasks that employees are paid to perform. Employees who perform essentially the same tasks are in the same occupation, whether or not they work in the same industry.
Industry: A group of establishments that produce similar products or provide similar services.
In an attempt to more accurately quantify short-run costs of globalization, the author creates a model of occupational choices in an economy where each period workers select into an occupation by weighing incomes with switching costs. Included in the switching costs are estimates of destroyed human capital. The model’s underlying assumptions are created using administrative panel data on Danish workers during the period from 1995 to 2005 (where aggregate Danish prices dropped 17% due to import competition from China and Eastern Europe).
There are three main finding included in the article, which all more-or-less confirm my existing understanding of the dynamics at play here.
“First, the majority of the distributional impacts, especially in the short run, are across occupations. Specifically, occupations explain nearly 60 percent of variation in lifetime earnings changes, while sectors only account for 16 percent. Second, the impact of import competition is largest for occupations within the tradable sector. For example, both the largest gains and losses in income are within manufacturing. Finally, while adjustment is costly and protracted, most workers still benefit from trade due to lower prices; only 5 percent of workers see a decline in lifetime earnings. Unsurprisingly, losses are concentrated amongst workers with comparative advantage in exposed occupations”
An illustrative example of Traiberman’s findings follows:
If there were an increase in import competition of accounting services, the effect on employment in the U.S. would be strongest for those employees with occupations similar to “accountant,” instead of those employees who work for a firm in the accounting services industry (though there is obviously overlap). However, most of the accounting workers who were displaced by increased trade competition would still benefit from trade in the long-run due to lower prices.
