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You Can't Benefit from Free Trade if You Don't Have a Job. Right?

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by Pierre Lemieux

If jobs were the cause of prosperity, banning agricultural technology would generate much prosperity by dramatically increasing employment in that sector.

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The economic argument for free international trade is basically that people produce in order to consume, not the other way around, so the economic system should be geared to the benefit of the consumer, not the producer. In the economic sense, producers include workers and owners of capital or land, who often join in associations called "firms." There are more consumers than producers, as everybody is a consumer but not everybody is a producer; some live off the production of parents, donors, or taxpayers. So there are more consumers than producers; but this is not the important point.

The important point is that free trade benefits consumers more than its competitive pressure harms producers. Economic theory provides a nice geometric demonstration of the proposition that the total cost of protectionism for consumers is higher that its total benefits to producers. The demonstration can be (imperfectly) rendered in plain English: if free trade harmed producers more than it benefits consumers, the former could outcompete their foreign competitors by bribing domestic consumers with better prices and still gain compared to ceding the market to foreign producers - and protectionism would not be necessary. When domestic producers are unable to compensate consumers for not patronizing foreign suppliers, it means that free trade benefits consumers more that it harms producers.

That free trade would have net benefits is not surprising in light of the theory of comparative advantage, due to 19th-century economist David Ricardo. If two countries - that is, all producers in the two countries - produce what they are most efficient at, the total volume of goods available for exchange and consumption will be larger.

A popular objection to these economic arguments is that a consumer cannot benefit from lower prices if he does not have a job. Since free trade destroys jobs, it cannot be said to help consumers in general. You can't consume if you lose your job - or you have to consume less by getting a lower paying job or relying on transfers, public (unemployment insurance, social welfare, and such) or private (help from family or charity). Let me call this the "populist" objection to free trade.

A first reply is that availability of jobs is a symptom, not the cause, of prosperity. If jobs were the cause of prosperity, banning agricultural technology would generate much prosperity by dramatically increasing employment in that sector. Nearly 12 million Americans worked in agriculture in 1910 (the year when agricultural employment reached its peak) while they number less than 2.5 million today (for a population three times as large). In the meantime, the total number of jobs in the American economy increased from 37 to 151 million. We should beware of the obsession of job creation, especially by government edict.

Even assuming that the number of jobs is a good indication of welfare, the populist objection is not valid. Although some workers can, like other producers, be harmed by competition, free trade does not destroy net jobs. At least as many new jobs appear as old ones disappear.

Consider the example of manufacturing. The number of jobs in American manufacturing dropped from its peak of 19 million in 1979 to 12 million today. Most recent job losses in manufacturing come more from the impact of technological progress than from import competition; economists Michael J. Hicks and Srikant Devaraj estimate that international trade accounts for only 13% of these losses. And - this is the important point - while manufacturing employment was decreasing, total employment in the economy increased from 99 to 151 million between 1979 and today, for a net creation of 52 million jobs. In the meantime, and this is the really important point, GDP per capita (the most comprehensive measure of the standard of living) increased by 79%.

Another way to approach the populist objection that free trade destroys jobs is to observe that the main factor in employment is population growth. Employment naturally grows in line with population. Every new worker who arrives on the labor market creates his own job in the very real sense that he spends as much as he earns (or the rest is invested, creating jobs too); indeed, it is precisely in order to spend an equivalent amount that he starts working and earning an income (a reflection of Say's law, recently featured in The Economist). The new worker creates his own job by creating another one elsewhere in the economy through his own consumption.

The figure below illustrates the general point by showing the level of civilian employment in relation to the American working age population (15 to 64 years of age) over the past half century. Each dot on the chart represents one year. Observe how closely employment growth tracks population growth. A simple regression analysis confirms the visual impression: the coefficient of correlation is 0.992 and is highly statistically significant (at a level of significance much lower than 1%). Because the working population increases with time, the horizontal axis nearly coincides with the chronological order. The drop in the employment towards the end of the curve corresponds to the 2008-2009 recession and the slow recovery that followed.

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We thus have both a straightforward economic argument and empirical evidence to the effect that economic freedom in general and foreign trade in particular do not destroy net jobs in the economy. The number of jobs moves with the number of people who want to work, barring regulatory obstacles created by government.



Pierre Lemieux is an economist affiliated with the Department of Management Sciences of the Université du Québec en Outaouais. His forthcoming book, to be published by the Mercatus Center at George Mason University, will aim at answering common objections to free trade. Email: PL@pierrelemieux.com.


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COMMENTS (8 to date)
Thaomas writes:

I think a better way of addressing the populist unemployment objection to freer trade is to have a set of monetary and fiscal policies that ensure that full employment is in fact maintained. In addition when advocating for efficiency/growth enhancing policies like freer trade or tax efficiency, we need to explicitly recognize that not everyone benefits and be willing to contemplate policies that compensate "losers."

midwest writes:

ok, there is one super glaring thing you seem to miss (maybe i misread it and missed it?)

and maybe there is a valid response:

but the populist case is if you replace a $70k manufacturing job with $20-30k service sector job that sucks, is awful, and that whole person's family, and community is way worse.

GDP per capita can go up (it has), jobs can go up (they have), yet 20-50 million people and families are way way worse off... how would you respond to that?

Feels like a total strawman. But willing to hear how you address the honest populist point I just brought up/

Alec Fahrin writes:

Midwest,

1. People gain from lower prices via foreign imports, so that 20-30k job turns into a 30-40k job in real terms.
2. Better to have 5 more 30k jobs than one 70k job that's only competitive because it is protected from market forces. The data appears to support my 5:1 ratio. Would you want 80% unemployment if one guy can get a great job?
3. Free trade forces domestic producers to compete in a free market. That is incentive to improve and innovate.

midwest writes:

1. ok, so the 70k job is now a 35 k job, so still way worse

2.There certainly was not 80% unemplyment 20-40 years ago.. so obviously the other situation worked before. Its a totally fair argument to say that the past wasn't sustainable. I mainly agree. Definitely some policy that has favored wealthy over blue collar, but mainly economic / technological reality caused major shift. I don't disagree there, but the major point of the article is that populists have a broken / no claim to be mad. Even if inevitable, there life is way way worse. and they are correct in that assessment

3. partially true. Still doesn't help the 10's of millions and there communities that have been destroyed

Also, increased crime, increased overdose rates, shortened life span, and less life satisfaction are externalities that occur to these 10's of millions, but there is no economic cost to wages or gdp, so these factors aren't included.

In short, totally fair to say that change was necessary / inevitable / efficient for the country as the whole, but to deny the populists that millions have had their lifes and livehoods and dreams decimated is factually inaccurate and is clearly why people don't undrestand the undercurrent of trump and politics in the developed world now.

Obviously none of this applies to me (highly educated / white collar etc), but its amazing some don't see this plain as day.

Owen Wall writes:

I definitely echo Thaomas's statement above. I think that free trade advocates in general are more or less totally missing the point of populist opposition to free trade. This article deals not at all with the issue as I see it.

The result of free trade is efficiency gains, but due to the USD's status in global trade and the Triffin Dilemma we cannot sustain simultaneously (A) free trade (B) stable maximal growth in the global economy (C) stable maximal growth in the domestic economy.

So, one way or another you have to stop being the unipolar currency of international trade, or you can't escape this secular stagnation.

If you restrict trade, the rest of the world can't get enough dollars to use the USD.

If you print more dollars to grow domestic NGDP at the expense of those saving USDs as reserves for international trade, they'll stop using the USD.

If you don't print more dollars to keep up US NGDP, domestic growth will continue to stagnate while countries that don't face the Triffin dilemma outpace us, until the USD is no longer the currency of international trade.

So tariffs and barriers to trade, or even just threats thereof, are just one way to end the USD's status as the global reserve currency for international trade. Once the world is instigated to set up multilateral frameworks for the future, as they are doing very actively, the US will be able to participate in trade freely without facing a permanent structural trade deficit due to being in the Triffin dilemma.

Owen Wall writes:

I apologize for a second comment, but I want to be clear: the reason that threatening tariffs is actually the PREFERABLE way to do the necessary job of ending dollar hegemony ASAP is that the alternatives are:

A) printing lots of nominal dollars, at which point foreign holders dump treasuries and we go into freefall

B) clinging desperately to dollar hegemony as long as possible until it ends naturally because the US economy becomes a sideshow

If you use trade barriers, yes, you cause some efficiency losses in the short term. But this is infinitely preferable to A) complete crash and B) slow decline for possibly decades.

With trade barriers, other countries are incentivized to begin using other currencies more, because procuring dollars in the future will be more difficult, but they do not have any increased incentive to dump dollars in the short term.

WagnerD writes:

One thing I would like to add, and you touched on this in the original post, is that our society's progression in technology is diminishing the demand for unskilled workers. It is not only an argument about people who want to work, but it is also an argument of "Who's skilled enough to work?" This is a big reason why people are encouraged to pursue a degree in higher education. Nowadays the experience earned in high school doesn't amount to the experience required to make a decent living in many fields of work.(The issue then is that schooling, even with financial aid, is unobtainable for many people due to the costs.) Employers will almost always hire someone with a degree than those without, because their mindset is on increasing productivity.

The opportunity cost on the employer's expense would decrease by investing resources in technologies that is capable of performing jobs that were once done by people, or people who are highly skilled to perform better. This is nothing new to our society, but the substantial advancement in technology has complicated the process for average people, without a degree, to learn how to operate machinery/technology, or even be skilled enough to compete with machinery for their job. It is almost impossible to get by without learning how to excel in many technologies presented currently. Today, we have robots that are used to perform surgeries. We are experiencing an increase in demand for people who are able to operate, design, repair, sell, etc. products like this across many fields of work.

As we continue to progress, and jobs require workers with higher skills, the demand for unskilled workers will continue to decrease, making it difficult for them to make a decent living, or perhaps even leave them unemployed. The only jobs for the low-skilled workers would be the low-skilled jobs (as always.) The unending surplus of unskilled workers will only increase more and more.
Yes there is a population who does not want to work, but there is also a population who is just not able to keep up. In a free-market, these people will not be able to thrive.

What do you all think?

Isaac Kogure writes:

I believe some aspects of free trade presented in this post would be very beneficial. Increased volume of goods from countries that specialize in certain goods would be very beneficial to consumers. They would be able to purchase more goods at a cheaper price. The need for more specialized goods could actually increase demand for more jobs to fill the demand for goods to be traded.

The only problem I see with the increase in goods is the surplus that may be left over from so much of a certain good flowing into the country. Consumers will only buy so much of a certain good before moving on to another good. Would we search for another country to trade with or would we ask for them to modify their product? I believe the only solution would be to decrease the number of jobs in that area to accommodate the demand drop.

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