MIT Report: Manufacturing Jobs Sent To China Hurt US Economy

New research by MIT economists is demonstrating the impact on the U.S. economy and its workers as low-wage manufacturing industries are sent overseas.

AsianScientist (Feb. 28, 2012) – The cannibalization of U.S. manufacturing jobs by China is a topic that can provoke heated arguments about globalization.

For the first time, new research by MIT economist David Autor and his colleagues is demonstrating the degree of impact on the U.S. economy and its workers from the rapid rise in low-wage manufacturing industries overseas, especially in China.

The effect of foreign competition is geographically widespread – ranging from heavy manufacturing in the industrial Midwest and including many areas in the South, the West, and the Northeast, which once had abundant manual-labor manufacturing jobs.

“The effects are very concentrated and very visible locally,” said Autor, professor and associate head of MIT’s Department of Economics.

“People drop out of the labor force, and the data strongly suggest that it takes some people a long time to get back on their feet, if they do at all.”

The study, published as a working paper by the National Bureau of Economic Research, examined the effect of overseas manufacturing competition on 722 locales across the United States over the last two decades.

Along with economists David Dorn and Gordon Hanson, the study found that in the early 1990s, low-income countries accounted for only about three percent of U.S. manufacturing imports; by 2007, that figure had increased to about 12 percent, with China representing 91 percent of the increase.

The areas of Chinese manufacturing that exploded in growth during that period included the production of textiles, clothes, shoes, leather goods, rubber products — and one notable high-tech area, computer assembly. Most of these production activities involve soft materials and hands-on finishing work.

“These are labor-intensive, low-value-added (forms of) production,” Autor said. “Certainly the Chinese are moving up the value chain, but basically China has been most active in low-end goods.”

In conducting the study, the researchers found more pronounced economic problems in cities most vulnerable to the rise of low-wage Chinese manufacturing; these include San Jose, California; Providence, Rhode Island; Manchester, New Hampshire; and a raft of urban areas below the Mason-Dixon line – the leading example being Raleigh, North Carolina.

“The areas that are most exposed to China trade are not the Rust Belt industries,” Autor said. “They are places like the South, where manufacturing was rising, not falling, through the 1980s.”

All told, as American imports from China grew more than tenfold between 1991 and 2007, roughly a million U.S. jobs were lost due to increased low-wage competition from China – about a quarter of all U.S. job losses in manufacturing during the time period.

The spillover effects of these job losses were evident – the shuttered businesses no longer needed goods and services from local non-manufacturing firms, and their former workers had less money to spend locally as well.

A city at the 75th percentile of exposure to Chinese manufacturing, compared to one at the 25th percentile, will have roughly a five percent decrease in the number of manufacturing jobs and an increase of about US$65 per capita in the amount of social insurance needed, such as unemployment insurance, health care insurance, and disability payments.

At a conservative estimate, that $65 per capita wipes out one-third of the per-capita gains realized by trade with China, in the form of cheaper goods.

“People like to think that workers flow freely across sectors, but in reality, they don’t,” Autor said. “Those numbers are really startling.”

New policies for a new era?

The response of the U.S. government to this growing threat is insufficient in Autor’s view.

“We do not have a good set of policies at present for helping workers adjust to trade or, for that matter, to any kind of technological change,” he said. “We could have much better adjustment assistance – programs that are less fragmented, and less stingy,” Autor said.

While the federal government’s Trade Adjustment Assistance (TAA) program aims to provides temporary benefits to Americans who have lost jobs as a result of foreign trade, Autor, Dorn, and Hanson estimate in the paper that the increase in disability payments is a whopping 30 times as great as the increase in TAA benefits in areas affected by new Chinese manufacturing.

In addition, apart from providing temporary benefits to the jobless, Autor would like to see the U.S. government come up with well-designed job-training programs to assist workers in reintegrating into the labor market.

“Trade may raise GDP, but it does make some people worse off. Almost all of us share in the gains. We could readily assist the minority of citizens who bear a disproportionate share of the costs and still be better off in the aggregate,” he said.

The study report can be downloaded here (PDF, 600 KB): Chi W et al. (2012) Adjusting to Really Big Changes: The Labor Market in China, 1989-2009.


Source: MIT.
Disclaimer: This article does not necessarily reflect the views of AsianScientist or its staff.

Rebecca Lim is a Singaporean-born medical doctor practising in Melbourne, Austraia. She earned her MBBS degree from Monash University, Australia.

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