In the shadow of prosperity, The Economist
(open link): Nestled among the wooded Blue Ridge mountains in Virginia's far south-west,
Galax is ... home to ... a huddle of textile and furniture factories. Over the
past few years, globalisation has hit hard. Unable to compete with Mexican and then Chinese competition, the town's old
industries have withered, taking thousands of jobs with them. Last year ...[t]hree big factories closed their doors... More than
1,000 people, around one-sixth of the town's workforce, lost their jobs.
Galax then acquired an “Economic Crisis Strike Force” for displaced
workers... [T]he Strike Force helps people apply for Trade Adjustment Assistance
(TAA), the government support America offers to those deemed to have lost their
jobs to global competition. TAA includes up to two years of unemployment
benefits while retraining, temporary subsidies to help pay medical insurance
and, for those over 50, a short-term top-up to any lower-paying new job. The
centre also co-ordinates more basic help, from child care to food banks run by
Thousands of people have walked through its doors in the past nine months,
many several times. Around one-third of those laid off last year are being
retrained. ... For some, particularly those in their 50s, the future looks
bleak. At 59, Paul Rotan sees little chance of finding another job with health
insurance, but he is still six years away from qualifying for Medicare... He is
terrified of what will happen in June when the temporary public subsidies for
his health insurance end.
But other, mainly younger, workers are already better off. After 19 years in
a textile factory, Bobby Edwards has retrained as a radiologist. ... Few of
these people are enthusiastic about globalisation. “No one trusts China around
here,” is a common refrain. But government help has cushioned the shock. “I'd be
lost if they weren't here,” says Mr Rotan, nodding towards the centre's staff.
In the neat world of economics text-books the downside of globalisation looks
much like Galax. Low-skilled workers in a rich country, such as America, suffer
when trade expands with a poorer country with plenty of much cheaper low-skilled
workers, such as China
If labour markets are efficient in the rich country the displaced workers
should find new jobs, but their wages will probably fall. Although the country
overall gains handsomely, these people are often worse off. Hence the case for
redistributing some of trade's gains and compensating the low-skilled losers.
One study suggests that, during the 1980s-90s, 65% of manufacturing workers
in America who lost their jobs to freer trade were employed two years later, but
most took a pay cut. A quarter suffered pay losses of more than 30%. ...
How much to spend? Nonetheless, help for displaced workers
has always been modest compared with the gains from trade. ... The United States
spends around $1 billion a year on helping trade-displaced workers. But the
economy overall, by one estimate, gains $1 trillion a year from freer trade. ...
Public scepticism about trade is rising in both rich countries and poor. A
host of big economic shifts, such as rising income inequality, are blamed on
global integration. ... America's elections last November brought in a clutch of
lawmakers deeply opposed to freer trade. To control this backlash,
globalisation's champions are keen to appear more sensitive to the losers.
Already, some shifts are evident. One of the first bills introduced in the
Democrat-controlled Senate is a big expansion of TAA, covering not merely
manufacturing workers but also service workers whose jobs have been “offshored”,
and offering help not just to individual factories, but to whole industries. ...
The fate of the current bill is uncertain, but the Democrats have stressed that
their support for future trade agreements depends on more help for workers who
lose out. ...
But cause and effect may not be so obvious. ... To judge by the number of
people receiving TAA, the [displacement is low]...: fewer than 120,000 workers
were deemed eligible for it in 2005. In the much bigger services sector, the
share is lower still. For all the hoopla about offshoring, the best estimates
suggest that only about 1m American service-sector jobs have actually moved
overseas. In short, trade's role in job losses is much smaller than the public
Most economists have long held that technology, rather than globalisation, is
the main cause of the rising gap between the pay of the high- and low-skilled.
But some argue that the distinctions between trade and technology are
increasingly irrelevant. ... (see
In the 21st century competition between firms and industries, ... is becoming
less important than competition between individual tasks within firms in
different countries. Whether he is employed in a furniture company or a
hospital, the American data-processor will be competing against someone from
Bangalore. Rather than affecting entire industries, or whole factories, global
competition will affect individual jobs—skilled as much as unskilled.
Such a shift helps explain the popular nervousness about globalisation. Many
more workers are worried that their jobs will be at risk. That, in turn,
increases the political appeal of assisting trade's losers. ...
An alluring Danish model As a result, it may be better to
focus on policies which improve job prospects for all workers. In Europe,
Denmark has led the way. The Danish system of “flexicurity” appears to offer the
best of both worlds: dynamic labour markets and low unemployment coupled with
generous support for those who lose their jobs. ...
Employers hire and dismiss
people at will. Around a quarter of the workforce is unemployed at some point in
any year. But the jobless enjoy generous welfare benefits while they look for
work, around 80% of their previous wage on average. To ensure this does not
deter people from finding new jobs, the Danes oblige the unemployed to be
trained and to look diligently for work. ...
But Denmark's approach has evolved over decades and cannot easily be copied.
Besides, it is extremely expensive. ... Denmark ... spends more than 5% of GDP on the unemployed, including almost 2%
of GDP on its “active” training and job-search programmes. ...
For America, which currently spends a mere 0.16% of GDP on such “active”
labour-market policies, the idea of Danish-style “flexicurity” is more a slogan
than a serious suggestion. ...
An alternative approach is to give displaced workers a subsidy if they are
forced into a lower-paying job. Such “wage insurance” already exists in a modest
form on both sides of the Atlantic. ... Since 2002 America's TAA has offered
wage insurance to any trade-displaced worker over 50: the government pays half
the difference between the old and new wage for two years, up to a maximum of
Getting other things right These experiments are too new to
evaluate. But in theory wage insurance is appealing. It helps soothe workers'
fears that they will suddenly lose income, but also keeps labour markets
flexible by encouraging people to find a new job quickly. Many on America's
centre-left see it as the key to maintaining political support for trade.
The proposed expansion of TAA would make any trade-displaced worker over 40
eligible for wage insurance. And more ideas are floating around Washington's
As public fears of globalisation rise, so will the political appeal of these
schemes. But they will have less impact than getting other, more basic, policies
right. Globalisation underscores the need for a flexible, dynamic labour market
and a well-educated, adaptable workforce. And a worker whose health care is not
tied to his job will be less worried about trade than one for whom job loss also
spells the loss of medical insurance. The tasks of ... reforming health care ...
and improving education ... are far more important than any amount of
experimentation with wage insurance or retraining schemes. If politicians really
want to respond to the worries caused by globalisation, those are still the best
places to start.
In an earlier section, after explaining how an older worker relies heavily on
the TAA program, and how a younger worker benefited from retraining ("government
help has cushioned the shock"), the article turns to economic theory and
concludes: "Although the country overall gains handsomely, [displaced workers]
are often worse off. Hence the case for redistributing some of trade's gains and
compensating the ... losers." Thus, the article cites both theory and evidence
in favor of programs that help displaced workers.
In addition, the article finds further support for the wage insurance
component of TAA because it can help with labor market flexibility. The first
paragraph of the last section says "wage insurance is appealing. It ... keeps
labour markets flexible..." The third paragraph says "Globalisation underscores
the need for a flexible ... labour market..." The conclusion? "The tasks of ...
reforming health care ... and improving education ... are far more important
than any amount of experimentation with wage insurance." Thus, wage insurance is
appealing, it's needed, and that leads to the conclusion that it's not very
important. I can't explain why the article spends so much time building a strong
case for helping displaced workers, then is dismissive of programs that do just
that in the final paragraph.
One final point, there is no need to distinguish between workers displaced by
technology and those displaced by globalization when talking about which workers
deserve help. But both are a form of structural change and cause workers to be
hurt for reasons that have nothing to do with their own abilities and effort,
they are just unlucky enough to be employed in the wrong industry, and wage
insurance and other programs should apply in either case.