Structural issues, not China, responsible for decline in US jobs

Over the past few years, US scholars have increasingly focused on the so-called "China shock "to labor markets, but a closer look at the factors influencing employment reveals a complex interplay between technology, industry evolution and structural issues within the United States.

While some may point to imports from China as the primary culprit behind declining employment in the US manufacturing sector, this article explores four key factors that present a more nuanced perspective.

The emergence of research on the "China shock" theory began in 2013 when David Autor and others published an article in the American Economic Review.

Their research, based on city-level analysis, suggested that imports from China could explain for a 25 percent decline in employment in the US manufacturing sector. Additionally, the article pointed out that import competition also led to a series of phenomena, including a decrease in per capita wages and labor participation rates, as well as increased payments via government transfers, giving rise to the concept of "China shock".

Their research, which resonated with a prevailing trend of trade protectionism in the US, gained significant attention across various fields, with a large number of articles and reports by think tanks referring to its findings.

Scholars from countries such as Germany, Japan, France, the United Kingdom, South Korea, Australia, and Norway also adopted a similar research approach to study the impact of import on labor markets in different nations.

Objectively speaking, import competition from China did, to some extent, impact employment in specific US industries. However, the primary reason for the decline in US manufacturing employment was the result of its own long-term structural issues.

Scholars in the US often selectively overlook these internal factors, placing excessive emphasis on the external effects of Chinese imports and demonizing China.

In this regard, this article aims to examine the biases and limitations in related research from a theoretical standpoint.

First, the impact of technological progress plays a bigger role in the decrease in US manufacturing employment. Technological progress and trade are considered the two most crucial factors of employment, but the existing research on "China shock" rarely discusses the relative magnitude of influence of these two factors.

For instance, Autor's study claimed that Chinese imports could explain for a 25 percent decline in US manufacturing employment, leaving the remaining 75 percent unexplained — a "black box" that apparently includes the impact of technological progress.

Basic economics suggests that in developed countries, the proportion of manufacturing goods in household spending decreases while the services sector's share increases. Moreover, the growth rate of labor productivity in manufacturing exceeds that in the services sector. Therefore, even without any trade deficit, the US would still inevitably witness a decline in manufacturing employment.

According to industry data, during the period of the fastest growth in Chinese exports to the US (2001-07), the output per capita in the computer and electronics industry increased by 259 percent, in contrast to a 28 percent decline in employment, which proves that the main reason for the employment decline was an increase in labor productivity.

Similarly, automotive and chemical industries saw output per capita increase by over 45 percent, with corresponding employment rates declining 19 percent and 10 percent, respectively.

The data led to a conclusion that, from an overall perspective, technological progress has a more significant impact on employment than trade. However, opposing technological progress is politically infeasible, while criticizing free trade holds huge political appeal. This is the reason why the media and politicians rarely reflect on the impact of technological progress on declining employment while exaggerating the negative effects of trade.

Second, the industries most affected by import competition are usually those in sunset or midrange and low-end phases. Most "China shock" studies suggest that in the first 10 years since China's accession to the World Trade Organization, the most severe shock was felt by labor-intensive sectors such as textiles, clothing and furniture that were already experiencing declines in employment due to low levels of workforce education and low investment in research. China's entry into the market only accelerated the already existing trend.

Third, manufacturing firms affected by trade shocks may transition to the services sector. Many US companies in the machinery, computer and electronics sectors have restructured to engage in research, design, management, marketing and other high-end fields, resulting in substantial job growth in the services sector.

For example, IBM transitioned from computer manufacturing to data solutions, and Apple shifted from manufacturing to product design. Such companies have successfully moved to higher positions in the production chain, which is typical in places with higher human capital, such as California and the New England region in the US.

In contrast, in places with lower human capital, such a transition is more challenging. For instance, if a factory in an old industrial base closes, its workers may shift to the restaurant or hairdressing sectors. Since the overall income of local residents decreases due to the factory closure, demand for restaurants and hairdressing services also declines, resulting in limited job growth in the services sector.

Additionally, the service industries in the US that are human capital-intensive are increasingly concentrated in large cities, where housing prices are relatively high.

Low-end workers may therefore face difficulties in moving and being employed in these cities, and high housing prices make it challenging to improve living conditions even if they relocate.

Consequently, they prefer to stay in their original industrial bases, which may lead to a "low-end lock-in", which is a major factor in the decline of many old-fashioned US industrial bases.

Therefore, manufacturing companies impacted by import competition may transition to the modern services sector, but the extent of this transition varies by region, largely depending on the level of local human capital.

Fourth, the fact that the impact of China's trade "shock" to the US is particularly severe is closely related to the latter's industrial structure. Many scholars from other countries have also studied the impact of "China shock", but their conclusions greatly differ from those in the US.

For example, research on Germany suggests that while import shocks led to a decline in employment, Germany's exports of automobiles, machinery and electronic devices to China also stimulated employment in return. Research on Japan indicates that consumer goods imported from China brought in a relevant impact on employment, but the import of intermediate inputs also promoted local manufacturing and employment. Research on Norway also shows that Chinese imports led to a decline in manufacturing employment, but the impact was only half as severe as in the US.

In summary, Chinese imports in general still largely contribute to improving the overall welfare of US citizens and reducing inflation.

Although import competition may inevitably lead to negative impacts on specific regions and demographics, potentially reducing the welfare of these vulnerable groups, the view that free trade is more beneficial than detrimental to the US is universally acknowledged in academia.

The so-called "China shock" is more a "US syndrome" caused by a bunch of problems originating from the country's long-term structural issues that US scholars, media and politicians often choose to overlook while exaggerating the negative impact of trade with China.

The writer is a researcher at the Institute of World Economics and Politics, part of the Chinese Academy of Social Sciences.

The views do not necessarily reflect those of China Daily.