January 1, 2012

The China Effect: More Than Lost Manufacturing Jobs

A new study says where Chinese imports are strong, unemployment, disability and other U.S. government “safety net” costs are high.

WHILE MANUFACTURING JOB LOSSES and monetary policy have long dominated the discussion about China's impact on the U.S. economy, a trio of economists is continuing to shine a spotlight on how the Asian country's exports increase spending on U.S. safety net programs.

China, as is well known, has exploded in the past 20 years, adopting modern technology, opening itself up to global trade and migrating 150 million of its workers from rural to urban areas. In the United States, Chinese imports rose from less than 0.25% of consumption in 1987 to almost 5% of U.S. consumption in 2007, says one of the study's authors, David Autor, economist and associate head of the economics department at the Massachusetts Institute of Technology.

Along with David Dorn, of the Center for Monetary and Financial Studies and the Institute for the Study of Labor, and Gordon H. Hanson, of the University of California, San Diego and the National Bureau of Economic Research, Autor released an analysis last year of Chinese imports' effects on local labor markets. The study found that exposure to Chinese imports affects more than manufacturing jobs. It also increases government “transfer payments” to households and individuals.

Transfer payments include unemployment insurance benefits, disability benefits, income support payments and in-kind medical benefits. Totaled for all labor industries, payments of these kind are two orders of magnitude larger than the transfer payments made through the federal Trade Adjustment Assistance program, which offers financial assistance to individuals who have lost employment due to foreign competition.


Raleigh, North Carolina, is a perfect example. From 1990 to 2007, 10 counties near Raleigh experienced a 40% decline in factory employment. Meanwhile, transfer payments from unemployment insurance, food stamps, Medicare and disability increased 74%.

“Trade analyses have historically looked at … industries or occupations,” Autor says. This study takes a geographic approach, and finds that strong Chinese imports have repercussions not just for manufacturers within a labor market, but also for other industries. For example, employees of manufacturers affected by Chinese competition spend less on services and food products. Individuals who are laid off don't have money to buy cars or for home upgrades. These reduced purchases, coupled with an influx of laid-off factory workers entering the labor market, eventually take a toll on wages in other local industries.

The report concludes, “While growing exposure to Chinese imports reduces manufacturing employment in a local labor market, it also triggers a decline in wages that is primarily observed outside of the manufacturing sector.”