What Happened to the Great U.S. Job Machine? The Role of Trade and Electronic Offshoring

The loss of manufacturing jobs and hundreds of thousands of service jobs over the past few years, and the threat of the loss of millions more to offshore outsourcing, is a clear call to our business and political leaders that our trade policies simply are not working. At the least, not in the national interest. (1) ********** THE BUSINESS CYCLE recovery of the past few years has been an unusual one. In particular, payroll employment since the trough of the 2001 recession has been remarkably weak compared with previous recessions--a point illustrated in figure 1. (2) The decline in payroll employment from the peak in March 2001 to the trough in November of the same year was modest, but employment continued to fall for the next twenty-one months, ending up just over a million jobs below the trough before starting to recover. This contrasts with most previous recessions, in which job growth following the trough was strong. The aftermath of the previous recession, that of 1990-91, was also characterized by relatively weak job performance, as figure 1 also shows. But the jobs picture since 2001 has been much weaker even than that "jobless recovery." [FIGURE 1 OMITTED] In many press reports and in the minds of many Americans, much of the weakness in the labor market is the fault of foreign competition. As the quotation above indicates, there is uneasiness that manufacturing and services sector jobs have been, or will be, moved abroad. Partly because of technological change and partly because of trade agreements, so the argument goes, U.S. workers now have to compete against a huge low-wage global labor pool, and the sustained weakness in employment since 2000 is a sign that this competition is undermining the great U.S. job machine. Most economists dismiss these concerns as showing a misunderstanding of how international trade works and of the ability of the U.S. economy to reemploy workers displaced by trade. Indeed, most economists would argue that, over the long run, the United States will have to reduce its trade deficit, and that this could create more opportunities for blue-collar workers in export industries. Similarly, the more services the United States imports, the larger U.S. exports of both goods and other services will eventually have to be to pay for them. But economists' reassurances on this point have not carried a lot of weight in the popular debate--or even at times in the policy debate. Putting the role of trade in the U.S. economy in perspective is not simply a matter of setting the record straight. Misperceptions on the part of workers may discourage them from acquiring the skills they need in order to get good jobs. Misperceptions on the part of voters and elected officials can lead to bad policies. In this paper, therefore, we try to put trade and electronic offshoring concerns in the right perspective, in a way that is easily understandable. We estimate the size of the first-round job dislocation that trade and electronic offshoring may have caused between 2000 and 2003. (3) The approach we use, and several assumptions we make along the way, have the effect of exaggerating the impact on trade and offshoring on the U.S. labor market. Nevertheless, the results show that the weakness in U.S. payroll employment since 2000 has not been caused by a flood of imports of either goods or services. It should certainly not be attributed to any trade agreements the United States has signed. (4) Rather, the weakness of employment is primarily the result of inadequate growth of domestic demand in the presence of strong productivity growth. The paper also goes beyond this basic result in several ways and makes the following additional findings: First, to the extent that trade did cause a loss of manufacturing jobs, it was the weakness of U.S. exports after 2000 and not the strength of imports that was responsible--the share of imports in the U.S. market actually declined. …