The victims of trade and how to help them

Based on article from The Economist, 21 January 2007

Those that lose out from trade expanding to a poorer country with cheap low skilled workers are usually the low-skilled workers in rich countries. In the US, the Trade Adjustment Assistance (TAA) aims to help those who lose out to this global competition. They gain 2 years benefits while they retrain and also receive other benefits such as medical insurance. Even still, the common refrain is that “No one trusts China around here”.

If labour markets were more efficient, this trade displaced workers should be more occupationally mobile and be able to find new jobs but many would find that they have to work for a lower wage than their previous job. Therefore, there are cries for redistribution of the benefits of globalisation.

In the US, labour markets are relatively flexible and therefore the impact is more on wages rather than employment. In Europe however, less people find jobs quickly and for those who do find themselves working for less.

$1bn a year is spend in the US to help the trade displaced but the gains from globalisation are far greater – the US gains $1 trillion from trade every year. The social safety net in Europe is much thicker with more spending on training and other benefits schemes.

Public scepticism has grown hugely over the costs of globalisation. As a result, policymakers like to appear more protective to win over votes – the US has recently expanded the TAA to include jobs lost in the services sector to “offshoring”.

However, the loss of jobs to trade is not as bad as people commonly think. In the US, around 20m jobs are lost every year involuntarily of which only 2-3% are a result of trade and only around 1m jobs from the US have been lost to offshoring.

The Danish model of “flexicurity” seems very attractive, which offers a combination of dynamic labour markets and generous support to those who lose out. The jobless receive around 80% of their previous wage and to ensure they do not stay on benefits, they are obliged to look for work and retrain at the same time. However, this scheme is extremely expensive, as Denmark spends 5% of its GDP on this and this scheme would also be difficult to adopt as it has taken decades to evolve into what it is now.

An alternative would be to subsidise part of the wage loss when workers move to jobs with a lower wage. This “wage insurance” makes the labour market more flexible as it provides more of an incentive to look for work quickly. It would also allay from of the fears of the workers who can be guaranteed to receive a respectable income. In Germany, 50% of the wage loss is made up in subsidies. Similar schemes have also been adopted in France and the US.

However, it would be better if governments focused on getting the basic longer term policies right such as ensuring a free labour market, reforming health care (by detaching it from the job) and improving education instead of relying on schemes such as wage insurance.

Links:
In the shadow of prosperity - The Economist