Globalization and Job Loss, from Manufacturing to Services

By Kletzer, Lori G. | Economic Perspectives, Summer 2005 | Go to article overview

Globalization and Job Loss, from Manufacturing to Services


Kletzer, Lori G., Economic Perspectives


Introduction

The impact of free trade, and more generally globalization, is a ready source of public debate, and the reach of that debate is broadening. When the impact of increasing foreign competition was felt mainly by the manufacturing sector (call this "stage one" of the free trade/globalization debate), the view of many, if not most, economists was strikingly uniform: Trade generates large net benefits to national economies. The gains accrue to consumers from lower prices and to the overall economy in efficiency, leading to higher aggregate welfare. Within the economics profession, there is similar, if less visible, agreement that liberalized trade reduces incomes to some producers and workers. With (large) net benefits, a common professional view of the question of "free trade" is a distributional one--that the distribution of the benefits from free trade, across industries, occupations, regions, and ultimately individuals, is uneven.

Perhaps not surprisingly, the economists' view does not resonate well with many Americans. Opinion surveys show that when asked a question mentioning both benefits and costs to trade, a majority of respondents chose the answer emphasizing the costs over the benefits (see chapter two in Scheve and Slaughter, 2001). It seems fair to conclude that many Americans have their doubts about the value of free trade, particularly when the costs are known to be borne by workers.

This dissonance of views arises from the nature of the economists' "It's a distributional issue" perspective. Economic theory suggests that not everyone benefits from free trade: Positive economy-wide benefits result from the gains of the "winners" exceeding the losses of the "losers." Clearly, some of the most contentious issues regarding free trade concern the size of the costs associated with moving workers from import-competing sectors to other parts of the economy. The highly visible nature of job loss, and the failure of current federal adjustment programs to compensate workers for their losses, clearly weakens popular support for the view that economic integration brings widespread benefits.

While perhaps overly simple, the characterization above captures much of the "free trade and jobs" debate, up to 2002. (1) That year saw the emergence of "services outsourcing," which I call "stage two" of the debate over globalization and the American labor market. Global outsourcing of services (or offshoring) is the services version of the globalized production that has become (almost) commonplace in manufacturing. With services outsourcing (potentially) broadening job loss to higher-skill (white-collar) workers and with its implicit challenge to presumed American comparative advantages, these activities appear to raise some new concerns, different from the ones voiced in the past.

Whether different or the same, the arrival of services outsourcing virtually guarantees that international trade and globalization will remain an important focus of public attention to job loss. The reverse will also likely continue to be true: Pervasive concerns about the incidence and consequences of job loss will remain an important part of discussions about globalization. In this article, I report on recent research on the nature and extent of manufacturing job loss related to trade. Investigations of services outsourcing are in their infancy, and my discussion reflects that thin knowledge base.

My discussion here is framed by the perspective that understanding the labor market costs of global trade is a requirement for moving forward equitably on the path of international economic integration. To understand how the principle of national net benefits from free trade can be translated into programs that compensate workers, it is necessary to identify who bears the burden of costs and to measure the size of that burden. In Kletzer (2001, 2002b), I report on recent research measuring the extent and nature of job loss related to imports; and in Kletzer (2002a), I summarize that research, with a particular focus on job losses associated with the North American Free Trade Agreement (NAFTA). …

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