Cracks in the Wall

David Autor, David Dorn, and Gordon Hanson have been producing a steady stream of very important papers that examine and measure the labor market impacts of trade. Their latest NBER working paper is a really nice one. Let me quote from the abstract:

China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences. These impacts are most visible in the local labor markets in which the industries exposed to foreign competition are concentrated. Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income.

I was struck by how the very slow adjustment reduces the short-run gains from trade to nearly zero:

The mobility costs that rationalize slow adjustment imply that short-run trade gains may be much smaller than long-run gains…Using a quantitative theoretical model, Caliendo, Dvorkin, and Parro (2015) find that in the immediate aftermath of a trade shock, constructed to mimic the effects of growth in U.S. imports from China, U.S. net welfare gains are close to zero.

This reappraisal about the net benefits from trade is happening concurrently with a reappraisal of the gains from immigration, that other aspect of globalization that generates even more controversy. A recent post by Branco Milanovic entitled “Migration’s Economic Positives and Negatives” shows the scope of the rethinking.

Migration, by raising incomes of the migrants…, is the most potent force for the reduction of global poverty, as well as for the reduction of global inequality…

However, I think that this is not so simple. There may be also some negative economic effects to consider. I see three of them. First, the effect of cultural or religious heterogeneity on economic policy formulation…Second, cultural differences may lead to the erosion of the welfare state…Third, migration might have important negative effects on the emitting countries…

We have, I think, to take into account also the negative economic effects of migration.

I am not so sure that Milanovic identified the most important adverse effects that we need to consider, but they are certainly effects worth pondering. It is the possibility that migration has many unintended consequences, and that some of these consequences might not be so beneficial, that I tried to address more formally in my recent JEL paper.

There is a very simple starting point for trying to understand the strange dynamics of the 2016 electoral cycle in the United States (and the ongoing political upheaval in Europe). Why exactly did it take so long for the obvious insights offered by the “new” trade literature and the reassessment of immigration to filter up the food chain and penetrate elite thinking?

By the way, this all reminds me of a very good and prescient book written by my colleague Dani Rodrik back in 1997: Has Globalization Gone Too Far?

Author: George Borjas

I am a Professor of Economics and Social Policy at the Harvard Kennedy School.

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