Saturday, June 19, 2010

The Count

8... the number of years it takes workers to reallocate into new industries after a 30% drop in manufacturing tariffs. Or at least according to simulations ran by researchers at the World Bank, the University of Virginia and Koç University in Istanbul.

Ok, perhaps we should back up for a second. Everyone knows that freer international trade is good cuz of stuff and junk. And by stuff I mean lower prices for consumers and by junk I mean efficiency gains from exposing domestic firms to international competition. The aptly named "gains from trade" can be bountiful, economists say, but reaping it's benefits involves adjustment costs as the less productive firms that can't compete "exit" the market (this is a euphemism for going out of business and firing workers) and the newly freed up resources (read: the newly unemployed) are reallocated.

Trade liberalization, in other words, produces both winners and losers, and the overall gains, proponents of free trade hold, outweigh the costs incurred by displaced workers.

But did you know that while every economist and their semi-literate grandmothers have attempted to estimate the value of the gains from trade, virtually no one has set out to comprehensively estimate the associated costs?

Well, Bernard Hoekman and Guido Porto, from the World Bank and the University of La Plata, respectively, have a nice summary of the most recent research on the subject. While the gains from trade can be huge, their collection of recent research shows that in practice workers displaced by liberalization often find it extremely hard to resettle into new and more productive work.

And this takes us to today's count. One of the studies cited by Hoekman and Porto, using data from the U.S., sets out to simulate the impact of a 30% reduction of manufacturing tariffs on labor adjustment costs. They find that the costs of moving between industries are very large, often several times a worker's average annual income. Perhaps more importantly, after liberalization it takes up to 8 years for 95% of the displaced workers to settle into a new line of work. This dramatic and lengthy period of adjustment implies sudden and large movements in wages, with displaced workers experiencing lower wages in both the short and long-run.

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