Transcript
DR DAVID GRUEN
The second session is implications of the rise of Asia and we've got three excellent speakers for this session, and each will have 20 minutes to make their presentation. And as with the first session, it will be followed by questions from the floor. So, let me introduce… Let me give a brief summary of the three speakers, and then call on the first speaker to come up and speak.
The first speaker will be Professor Gordon Hanson who is Director of the Centre on Emerging and Pacific Economies at the University of California, San Diego, and he's also a research associate at the NBER and co-editor of the Review of Economics and Statistics, and Professor Hanson is going to speak on trade adjustment worker level evidence. But let me introduce the other two before I ask Professor Hanson to come up.
The second speaker is Professor Anne Krueger who's the Professor of International Economics at the School for Advanced International Studies, Johns Hopkins University, which is the school that Max Corden used to teach at before he returned to Australia. She's also the Senior Fellow at the Centre for International Development and the Herald L. and Caroline Ritch Emeritus Professor of Sciences and Humanities in the Economics Department at Stanford University, as well as having a long and distinguished career including very senior jobs at both the World Bank and the IMF - as well as being a good friend of Australia. Anne Krueger comes to Australia frequently. And she will speak for 20 minutes on the role of trade openness in structural change in the rise of Asia.
And the third speaker is Dr Chris Kent from the RBA. Dr Kent is the Assistant Governor Economic at the RBA and in this role he's responsible for the Reserve Bank's Economic Analysis and Economic Research departments, and presents on the economic outlook to the board each month. And Dr Kent will speak for 20 minutes on the implications for the Australian Economy of strong growth in Asia.
So without further ado, let me call on Professor Hanson to come to the podium.
PROFESSOR GORDON HANSON
Thank you very much. I'd like to thank the Australian Treasury and the Reserve Bank of Australia, and the International Monetary Fund for this invitation. It's great to be here in Australia - my first visit to the country. What we saw in this morning's presentations were perspectives on the trials and tribulations of adjusting to growth. In Australia's case that means adjusting to dramatic improvements in the terms of trade. I'm going to talk about the US experience in adjusting to Asia's growth, and in particular China's growth, and there we get the other side of the ledger. You can divide the world somewhat into the countries that produce what China buys, and the countries that produce what China sells. Australia's in the former category. The US is a bit in both categories, but primarily in the latter.
If we look at the United States' experience of trade with China over the last two or three decades, what we see to be sure are many positive benefits. We see an increased variety of consumer goods; we see lower prices for consumer goods; we see increased variety of intermediate inputs; and we see increased demand for technology goods - Apple and Microsoft and Google have no doubt benefited from China's rise. But we also see a dramatic increase in import competition. What this graph shows for you in the blue line is the share of total consumption of US goods accounted for by China and the rise is just spectacular, as is every figure which summarises China's growth in the last two decades. You go back to the late 1980s, and the share of US consumption that China accounted for was trivial, was less than 1%. And now it's 5% and it is continuing to rise. During that time period the share of global manufacturing exports produced in China went from about 1% to 13%.
So, China's growth represents a major shock to the global system, adding manufacturing capacity. And Dr Menon nicely described this in his presentation this morning and that was, it's a process of catch-up. China's growth is not a miracle; it's more of a recovery from the policies that existed from 1949-1978. So, reform and opening unleashed China's potential, and this first phase of China's growth was almost sort of a mechanistic process of China just beginning to get to global technology levels.
Now, what you see in the dashed red line on this figure is the share of US employment in manufacturing. What we get is something of a scissors. That share was around 13% in the late 1980s and is now down to under 9%, so it's tempting from this picture to infer causality. The economist's job is to try and tease out causal relationships in complicated environments, and that's what I'm going to try and do in the context of this paper. There are certainly many things behind the decline of manufacturing in the United States, and what we'd like to argue in the work I'll talk about, joint with David Dorn and David Otter and Jae Song, is the role that greater import competition may have played in that.
So, the context in which we'll be… that we'll be examining has already been laid out. It's this first phase of China's growth. And during the first phase, what do we have? We have dramatic productivity growth in Chinese manufacturing, so total factor of productivity for the median Chinese manufacturing plant was 15% per year from 1992-2007. And so, to an economist what does this look like? This looks like a global supply shock. China during this period accounts for 75% of growth in manufacturing value added in low and middle-income countries. Now, there's another important feature of the US relationship with China which Professor Fan discussed earlier, and that's the current account situation.
As US imports from China have surged, US exports to China have grown - they've grown, but kind of tepidly. US imports from China and manufacturing are six times US exports to China. So, what has happened? The US has in effect frontloaded the gains from trade. We have enjoyed all of those great consumer goods, borrowed money from China to pay for that consumption binge and said, thank you very much, we'll pay you back in the next generation and we hope we're good for it.
In thinking about the adjustment process, that trade balance is important because what it means is, every job that's affected by imports is not necessarily offset by some job that's affected by exports. So, there is going to be a temporal adjustment process where import competition is going to hit now, and that process of export-led labour demand growth is probably going to come down the line.
So, there is to be sure a lot of research that's been done trying to understand the impact of trade on labour markets. A lot of this research - not all of it, but a lot of this research, has focused very simply on the question, what does international trade mean for equilibrium wages, from market-level wages? In the research agenda we've embarked on we've tried to get at other aspects of labour market adjustment to trade, that highlight the role of frictions in the labour market. In one paper which is already completed we looked at how US regions have adjusted to greater import competition from China, exploiting the fact that if you go back to the 1980s, US regional economies varied quite a bit in their pattern of specialisation in manufacturing and in the types of manufacturing they were specialised in.
What we found is that regions that were more exposed to trade with China saw larger declines in manufacturing employment and that didn't lead to, as you might expect in the US context with our very dynamic labour markets, to outmigration. And this came as a big surpris
e to us. It led to increases in medium-run unemployment, big increases in exits from the labour force and significant increases in usage of government transfers. An important part of that - the adjustment process in the way US labour markets are working, is people exiting the labour force and taking up government benefits. So, this highlights a fiscal component to the adjustment process, which I don't think we had fully appreciated before. And in closing, I'll talk about the policy dimensions of this.
What we're going to do, in the very brief discussion I'll give you of our second stage in this research project, is to look at the level of individual workers. We're going to have data from the US Social Security Administration, and that includes… that covers, not all workers in the US economy, but a substantial fraction. And so we're able… we have access to complete records on what workers earn for each firm for whom they work, in each year from the late 1970s right up to the eve of the financial crisis. And what we'll do is we'll say, given some limitations on the data, we're going to focus on what happens to these workers' earnings in the 1990s and 2000s. And we'll ask the question, let's look at workers who were in 1991, who were in industries that saw larger increases in import competition from China, and let's compare them to workers who have similar observable characteristics - similar initial wages, work for firms of similar size who have a similar wage structure, workers who have similar years of experience working for that firm. And then we'll, in effect, - this is the magic of regression analysis - be comparing workers who look very similar in every dimension, but what happens in that initial industry of employment. And then we'll look over that 15 year time period and try and see, do the workers who started off in industries that were ultimately more exposed to import competition from China differ in what happens to their livelihoods, from workers who were less exposed? So, we're going to let workers move between industries, and indeed that will be an important part of the story.
Now, if were to take your textbook neoclassical model of the economy seriously, what would that tell us, or what would that assume? There should be no difference between these workers, because labour is perfectly mobile between sectors and occupations and regions. We want to relax that assumption and say, take workers who look similar - do their outcomes differ based on where they start? In the paper we have spent a lot of time thinking about issues of causality and how we identify causal impacts, and we worry a lot about how we measure exposure to trade. I won't say any more than that. I'm happy to talk more in the Q&A or personally, just trust me that we worry a lot about it. That's the job of economists these days, is to worry about how well we do the statistics.
As I mentioned, we have access to this incredible data set, which is basically the entire work history of everybody who pays into the social security system, into the US Public Pension System. That's a huge number of workers, so we'll just take a 1% sample. That still gives us a million odd people that we'll be looking at, and what will be an important distinction that we'll be making is between workers who we'll call high labour force attachment workers, who prior… who in the 1980s were working full-time; and workers that we'll call low labour force attachment workers, workers who were working intermittently or part-time. Much of the analysis that's been done is forced to focus on that former group, the full-time workers. What we're going to find is those part-time workers are the ones who absorb a big part of that adjustment process, and they'll be an important part of our story.
You might think, in thinking about which industries are more exposed to import competition from China, that it's simply a matter or labour intensity. That is, it's more labour-intensive industries that are hit and less labour-intensive industries are not. Something that came as a real surprise for us was that there's huge variation, even when you control for labour intensity, in which industries are affected. On the vertical axis… I won't ask you to absorb this graph. It's a wonderful graph; I encourage you to delve into the paper and appreciate its beauty. What it tells us is that if you look at a really labour-intensive sector like apparel and textiles, what you see is huge variation across the industries within that sector and how much import growth there was from China. So, we're actually able to control for industries initial patterns of labour intensity, of productivity and productivity growth in the pre-sample period, a long list of compounds that we worry about.
I won't spend any time on our regression model, other than to say; we worry a lot about trying to control for the worker characteristics that we might think be related to their outcomes. We know that low-wage workers have really taken it on the chin in the US in the last couple of decades. And we worry a lot about controlling for industry conditions associated with things like the pace of technological change, de-unionisation and other factors. We're limited by the data we have, so we do an imperfect job of this, but it certainly kept us up nights thinking about ways in which we could control for this stuff.
I want to talk about three sets of results. The first set of results is on cumulative earnings. We'll ask the question, between 1992 and 2007; let's look at your total labour market earnings over that period. That's not your lifetime labour employment, but it's your middle-career… I'm sorry labour earnings. And then we'll ask, do those cumulative earnings differ for these two workers - workers who start off looking pretty similar, other than their initial industry of employment - the more exposed worker versus the less exposed worker. In the paper, what we do is pick somebody out that 25th percentile of trade exposure, and that was in an industry which saw very little increase in import competition from China; and then pick a worker at the 75th percentile of increase in trade exposure, and so that was a worker who saw import penetration ratios increase by about 7%.
So, what do we see for that more exposed worker? Significantly lower cumulative earnings over that 15-year period equal to about half a year's wage when measured in terms of their initial earnings. So, that's half a year's wage over a 15-year time period. That's a big number, but spread over 15 years it doesn't necessarily mean a large change on a per-year basis. So, if you start off in one of these more exposed industries, no matter how many times you move or everything else, what's happening to you? - Lower lifetime earnings.
Now, that can come about through two mechanisms. One is that you spend more time unemployed; a second is that you stay working, but you earn less for how much you work. Now, this first sample we're looking at here is that sample of workers with high labour force attachment. And it may not be surprising to you that these are workers for whom the unemployment issue isn't a very big deal - they stay working. What happens is reduction in their earnings or about 3% per year. So, first result then: lower cumulative earnings, with that being associated with lower earnings per year.
And then we want to ask, well, how does this come about? Does this come about because that initial firm you were working in takes a wage hit and you stay there? Does it come about because you get pushed out of that firm into another firm in your industry, or do you get pushed out of your industry altogether? So, that will be the second result we'll focus on. I want to highlight one feature of this first result in terms of lower cumulative earnings - who's most affected?
And we find four groups who are disproportionately affected. First, your low wage workers. You take a birth cohort and we split the sample according to workers who have below-median wages and above-median wag
es. It's that low wage group which accounts for all of this effect. So, low wage workers are much more exposed to import competition - no surprise there. What we're able to do in this paper is just capture that pretty precisely.
Now, the thing about the US economy is that low-wage workers aren't a random sample of manufacturing workers; about 75% are women. So, what does this mean? As a consequence of low-wage workers being affected, women are disproportionately affected. Now, low-wage men and low-wage women suffer similar effects of increased import competition. So, it's not that women and men of similar skill levels are different, or similar wage levels, but it's that women are disproportionately likely to hold those jobs that get hit more by import competition. Secondly, there's these workers with low labour force attachment where we really see the much bigger impacts.
Okay, second result. What does increased import competition do to your employment profile? Well workers, as might fit with your stereotype of the US labour market, are pretty mobile. The average worker only spends six years working for the firm they started out working with in 1991, and under eight years in that initial industry. So, what happens to those more exposed workers? They work about half a year less in that initial firm; they work about two thirds of a year less in that initial industry; and they work about a third of a year more elsewhere in manufacturing. What's going on? More trade exposed workers experience greater job turning. This is important in light of a lot of labour market research which has shown us that industry-specific human capital seems to be important. What does that mean? There are components of individual wages associated with their expertise in an industry, and when somebody gets pushed out of an industry, that industry-specific human capital gets destroyed.
A final result is on bringing in the policy dimension. We're able to observe in our data an uptake of a sub-set of government benefits related to social security - retirement income, supplemental income that you get if you are below some income threshold, and disability insurance. These are working age individuals, so that retirement income doesn't come into play. Since they're gainfully employed at the start of the sample, that cash assistance doesn't come into play. What does come into play is disability insurance.
So, as the US has dismantled its safety net over the last couple of decades, what have we seen? A dramatic increase in the usage of disability insurance, in a sense, as a way in which workers are insuring themselves against labour market shocks. And from a policy perspective, this is a disaster, because what does this policy do? It basically bribes you to stay out of the labour force. You only get disability insurance if you exit the labour force. And what we find is that most workers who take up disability insurance stay on for the rest of their working lives, until retirement or death, and the presented discounted value stream of the income the typical worker gets is $350,000.
So, from a policy perspective, what do we have? - Workers using a very inefficient tool to adjust to these shocks. Now, what we find in our sample is that these high labour force attachment workers, they show about a 12-15% increase in the likelihood that they receive disability insurance at some point during the sample, but our low labour force attachment workers experience effects that are 10-12 times that size. So, that group we're seeing is really sensitive to these trade shocks in terms of their policy responses.
I'll close with this, in terms of thinking about what are the policy tools that the US currently utilises to help workers adjust to import competition. None of what we've said negates the notion that the US gains from trade with China; it's just saying there are some adjustment costs in that process that we might not have fully appreciated. You might think about policies that help you address that. We have two programmes in effect. Trade adjustment assistance which directly targets workers who lose their jobs because of imports - it's very small, and you only get it if you stay out of the labour force. And the second, as I mentioned, is this unintended policy tool of disability insurance, which is a very inefficient tool.
So, what we've learned from this process is, if we want to help worker adjustment in an efficient means, we've got a long way to go on the policy side.
Thank you very much.