Trade and labor markets: Lessons from China’s rise

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DAVID H. AUTOR
Massachusetts Institute of Technology, USA, and IZA, Germany
Trade and labor markets: Lessons from China’s rise
The China Shock has challenged economists’ benign view of how trade
integration affects labor markets in developed countries
Keywords: trade adjustment, manufacturing, non-college workers, China Shock
Trade and labor market s: Lessons from China’s rise. IZA World of Labor 2018: 431
doi: 10.15185/izawol.431 | David H. Autor © | Februar y 2018 | wol.iza.org 1
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AUTHOR’S MAIN MESSAGE
International trade integration creates diffuse benefits and concentrated costs. Until recently, economists were sanguine
about the limited practical relevance of theoretical implications for workers in developed countries. Evidence from the
China Shock has overturned this benign view. China’s rapid rise, while enormously positive for world welfare, has created
identifiable losers in trade-impacted industries and the labor markets in which they are located. To mitigate the harms
and share the benefits of trade integration more broadly, policymakers should consider modernizing trade adjustment
programs, providing wage insurance to displaced workers, and expanding the set of workers eligible for work-contingent
wage support, such as the US Earned Income Tax Credit.
Imports from China affect government transfer
receipts in commuting zones, 1990–2007
ELEVATOR PITCH
Economists have long recognized that free trade has the
potential to raise countries’ living standards. But what
applies to a country as a whole need not apply to all
its citizens. Workers displaced by trade cannot change
jobs costlessly, and by reshaping skill demands, trade
integration is likely to be permanently harmful to some
workers and permanently beneficial to others. The “China
Shock”—denoting China’s rapid market integration in the
1990s and its accession to the World Trade Organization
in 2001—has given new, unwelcome empirical relevance to
these theoretical insights.
KEY FINDINGS
Cons
Without policy intervention, trade will almost
necessarily harm some individuals and industries.
Labor market adjustments to trade operate with
weakness and are materially offset by forces that
amplify trade-induced displacement.
The adverse impacts of trade are highly concentrated
among specific worker groups and locations.
Trade-induced employment impacts are magnified
by inter-industry linkages, creating adverse spillovers
to other manufacturers and non-manufacturers.
Trade adjustment programs are too small to
be economically consequential, and passive
responses to worker displacement impede labor
market adjustment.
Pros
Trade among consenting nations raises GDP in all
of them.
The benefits from trade tend to be small at the
individual level but broadly distributed and hence
large in aggregate.
Because trade grows the national pie, it creates an
opportunity for every citizen to acquire a modestly
larger slice; no one necessarily need have a smaller
slice.
Policymakers have multiple levers available to
ensure that the gains from trade are more broadly
shared.
Note: Estimated causal effect of a $1,000 per worker increase in exposure to Chine se
imports on per capita transfer payments from federal and state transfer programs.
TAA = trade adjustment assistance. SSA = Social Security Administration.
Source: Based on Table 8 of [1].
Change in US$
Unemploy-
ment and
TAA benefits
SSA
disability
benefits
SSA
retirement
benefits
Other
government
income
assistance
Govern-
ment
medical
benefits
Total
benefits
$3.65 $8.40 $10.00 $15.04 $18.27
$57.73
70
60
50
40
30
20
10
0

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MOTIVATION
The costs and benefits of free trade are among the most contentious topics in economic
policy, no less today than two centuries ago when David Ricardo developed the theory of
comparative advantage. While economists often argue in policy discussions—though not
in textbooks—that trade is Pareto improving (i.e. at least one party wins without any other
party losing), most laypeople view it as a constant-sum game, wherein exporters win and
importers lose. In truth, both views are oversimplified. Trade grows the economic pie—
that is, it is not constant-sum—but it typically shrinks the slices received by some citizens.
Economic policy must grapple with how to maximize the shared gains while mitigating
the concentrated costs that accompany trade integration.
DISCUSSION OF PROS AND CONS
The conventional wisdom
Introductory theory treats trade between nations as not typically being Pareto improving.
In their undergraduate textbook, Paul Krugman and Maurice Obstfeld write: “Owners of
a country’s abundant factors gain from trade, but owners of a country’s scarce factors
lose. [...] [C]ompared with the rest of the world the United States is abundantly endowed
with highly skilled labor and [...] low-skilled labor is correspondingly scarce. This means
that international trade tends to make low-skilled workers in the United States worse
off—not just temporarily, but on a sustained basis” [2].
For the first three or four decades after World War II, however, there was little cause
to question the benefits of trade. Most trade occurred between nations with similar
average incomes, which meant that any distributional impacts were limited. The rise of
inequality in the 1980s and 1990s spurred an extensive literature that sought to quantify
the contributing roles of trade, technology, labor market institutions, and other factors.
A reasonable summary of the consensus around 2000 was: (i) Trade had not been a
major contributor to declining manufacturing employment or rising wage inequality in
developed countries over the past several decades. (ii) If displaced by trade, workers
employed in regions specializing in import-competing sectors could easily move to
other labor markets. (iii) Due to the “law of one price” for skills—meaning that skills,
like currency, have the same market value anywhere within a given country—any adverse
effects of trade on low-skilled workers would reduce the wages of this group nationally,
rather than primarily affecting the outcomes of trade-exposed workers [3].
Based on these observations, it was generally held that while trade might modestly
affect national wage levels, it would have no effect on regional or local employment
The law of one price
The law of one price stipulates that a commodity must sell for the same price in all locations
at a given point in time due to the force of arbitrage (that is, if prices differ between
two markets, commodities will be bought in the cheaper market and sold into the more
expensive one until prices converge). Applied to labor markets, it says that all workers
of the same skill level should be expected to receive the same hourly wage, regardless of
where they work or even what job they do. If this law held literally, then a fall in demand
for Java programmers in New York would reduce wages of Java programmers equally (and
modestly) in all parts of the US, meaning that New York-based Java programmers would
see no larger a decline in wages than those in Wichita, Kansas.

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rates. Moreover, considering the assumed fluidity of the US labor market, the aggregate
gains from trade in the US should be positive, even in the short or medium term (that is,
without much delay due to frictional adjustment).
Just as economists were reaching consensus on the impacts of trade on wages and
employment, an epochal shift had begun. China, which had lagged economically for
centuries, was emerging as a global power and, in the process, reshaping established
patterns of trade. The long-held belief that while trade might in theory be strongly
redistributive, when in pr actice it was relatively benign, has been over turned by more recent
evidence. Similarly, the idea that trade adjustment is rapid and relatively painless, with
effects spread out over broad skill categories rather than being born disproportionately by
workers in trade-competing industries or locations, has also been discredited. Moreover,
when measuring the potential gains from trade, recent evidence finds that the short- and
medium-term adjustment costs of large trade shocks are substantial.
China’s rise over the past decades offers a rare opportunity to study the labor market
impacts of a large trade shock in developed economies. The evidence gained from studies
of this phenomenon makes it clear that the distributional consequences of trade are
robustly evident, consistent with canonical theory.
While this evidence does not refute the long-held view that trade increases aggregate
welfare or national incomes—indeed, China’s meteoric rise from endemic poverty to
burgeoning prosperity bears testimony to the potential of trade to deliver rising living
standards—it makes clear that trade has both significant benefits and substantial costs.
These include distributional costs, which have long been recognized by canonical theory,
and adjustment costs, which the literature has typically downplayed. Gaining a keener
understanding of when and where trade is costly, and how and why it may be beneficial, are
key goals for trade and labor economists. Likewise, policymakers and applied economists
should devote renewed focus to managing and mitigating the costs of trade adjustment.
The “China Shock”
One of the toughest challenges for empirical analysis of the causal effects of trade on labor
markets is that changes in one country’s trade policy are often driven by changes in the
behavior of its trading partners. Several features of China’s economic rise help researchers
to overcome this challenge. First is the unexpected nature of China’s export growth. Even
after reform implementation in the 1980s, few predicted how important a role China
would come to play in the global economy. China’s share of world manufacturing exports
rose only modestly between 1984 and 1990, from 1.2% to 1.9%. In the 1990s, however,
its trade expansion began in earnest.
Second is the depth of economic isolation and accompanying economic distortions
during the Maoist era, which kept China far inside its production frontier. Between 1952
and 1978, China’s GDP per capita decreased from 59th to 134th out of the 167 countries
covered by the Penn World Table. When China’s economic expansion began, it ignited a
phase of rapid catch-up growth that in part reflected how far China had fallen relative to
the developed world.
Manufacturing has been the driving force behind China’s economic turnaround. Between
1991 and 2012, China’s share of world manufacturing value added increased six-fold,
from 4.1% to 24.0% (Figure 1). China’s stellar growth generated a large positive net global
supply shock for manufactured goods, coupled with a large positive net global demand

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shock for raw materials. Regional and national economies differ greatly in their exposure
to these two forces, and the effects of China’s rise are thus likely to vary across locations
according to their own patterns of industry specialization.
Industry-level impacts
Taken as a whole, China’s rise is a singular global macroeconomic event, which makes
it challenging to empirically identify its consequences. However, the distinct nature of
China’s comparative advantage gives rise to substantial sectoral variation (i.e. cross-
industry and over time) that can be used for credible identification.
Industrialized countries’ product markets were the first to feel the effects of supply shocks
in China. As China’s productive capabilities improved and its trade costs fell, the intensity
of competition for US goods increased, inducing a contraction of US industries subject
to greater import exposure. Using data on US manufacturing plants for 1977–1997, one
study examines the impacts of increased exposure to import competition from low-
wage countries [4]. The authors find that over five-year intervals, industries facing larger
increases in exposure to trade experience higher rates of plant exit. Among the plants that
survive, those in more trade-exposed sectors undergo greater falls in employment and are
more likely to switch to a different sector.
A recent study from 2016 provides a complementary analysis that moves the focus to the
industry level and extends the data forward in time to cover the period from 1991 to 2011
[5]. The authors exploit an identification strategy that involves instrumenting observed
changes in industry import penetration in the US with contemporaneous changes of
Chinese imports into other countries [1]. This strategy posits that if numerous rich
countries simultaneously substitute Chinese-produced goods within detailed product
categories for domestically produced goods or imports from other countries, then China’s
comparative advantage in these goods improves (e.g. a fall in price, or in transport or
tariff costs, or a rise in the quality of China’s exports). These forces correspond to a
Figure 1. China’s share of world manufacturing activity
Source: World Bank, World Development Indicators. Online at: https://data.worldbank.org/data-catalog /world-
development-indicators
Percentage
25
20
15
10
5
0
1990 1995 2000 2005 2010
China’s share of world manufacturing value added
China’s share of world manufacturing exports

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supply shock from the perspective of China’s trading partners. Consistent with previous
results [4], this study shows that US industries facing rising exposure to Chinese imports
experienced sizable contractions in employment, number of establishments, and
employment per establishment [5].
These findings make clear that employment in import-competing US industries has
shrunk as a result of China’s rapid growth. For researchers, the challenge is to measure
the distributional effects and net economic costs and benefits of these labor market
impacts. For policymakers, the challenge is to recognize these costs and benefits, while
maximizing the latter and mitigating the former. Quantifying these costs and benefits
requires exploring mechanisms that are not evident from the basic facts above, specifically:
•Do the geographically concentrated industry-level shocks to manufacturing translate
into localized employment shocks, or do they dissipate regionally and nationally? If
they do have localized incidence, are these effects offset or amplified by local labor
market mechanisms?
•To what extent are trade-induced reductions in industry employment compensated
for by employment gains elsewhere in the economy, potentially outside of trade-
impacted regions?
•Are wages the main margin of adjustment to trade—as has traditionally been believed—
or are effects also seen on overall employment, or both? If trade does affect overall
employment, what are the costs to individual workers and to the public at large?
•Are workers employed at trade-impacted firms and residing in trade-impacted local
labor markets disproportionately affected by trade? Or do these shocks diffuse
nationally across workers with comparable skills, thus diluting their direct effects?
Regional employment impacts
Because manufacturing activity tends to cluster in specific areas of the country, with
a region’s manufacturers often concentrating in a narrow set of sub-industries, local
exposure to trade varies substantially across locations. Within specific manufacturing
regions, there is also wide variation in the industry composition of local firms. To
measure regional trade exposure, one of the above-mentioned studies exploits regional
industry specialization patterns in the pre-shock period, thereby averting the potential
confounding factor created by endogenous adjustment of industry location to concurrent
trade shocks [1].
Figure 2 presents the geographic distribution of exposure to increases in Chinese
import competition across commuting zones (CZs) between 1991 and 2007. The
exposure measure depicted in the figure holds the share of manufacturing in each CZ’s
employment to be constant as of 1990. It thus measures import competition for the set
of manufacturing industries represented in a location, rather than reflecting the overall
prevalence of local manufacturing. Over the period 1990 to 2007, CZs that were more
exposed to import competition from China experienced substantially greater reductions
in manufacturing employment. Contrary to the established understanding of US labor
markets as fluid and flexible, over the course of a decade, trade-induced manufacturing
declines in CZs were not offset by sectoral reallocation or labor mobility. Instead, overall
CZ employment-to-population rates fell at least equally with manufacturing employment
rates, and generally by slightly more.

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These results do not support the traditional assumption of the trade literature that local
employment effects of sectoral demand shocks are short lived, and, moreover, they also
fail to support the assumption that such shocks do not differentially reduce employment
rates in directly impacted CZs relative to the national labor market. The fact that these
localized effects endure for the span of (at least) a decade suggests that the effects of
trade shocks on labor markets are likely amplified by slow and incomplete adjustment.
They also reveal that adjustment does not accrue primarily along the wage margin.
While one would expect a modest reduction in wage levels among low-skilled workers
nationally, sizable falls are instead found in employment rates within trade-impacted
local labor markets.
It is also important to note that analyses for Denmark, Norway, and Spain, covering
periods from the late 1990s to 2007, find results that are consistent with the US evidence,
suggesting that the phenomenon is not exclusive to the US (see for example [6]).
Commuting zones
A commuting zone (CZ) is a geographic area used in population and economic analysis.
Rather than being set by official boundaries of states, counties, or metropolitan areas,
CZs are constructed using data on people’s actual commuting patterns. Specifically,
a CZ is a set of contiguous US counties containing at least 100,000 residents where:
(i) the centroid of the county cluster is commutable from its outskirts; and (ii) most people
who live in the county cluster also work there. In 1990, there were 741 CZs identified in
the US. In 2000, this number was calculated at 709, meaning that the average effective
geographic size of labor markets had increased.
Figure 2. Geographic exposure to trade shocks at the commuting zone level
Note: The exposure measure reflects differences in the mixture of manufacturing industries across CZs, while
abstracting from variation stemming from differences in manufacturing prevalence.
Source: Based on data from Autor, D. H., D. Dorn, and G. H. Hanson. “The China syndrome: Local labor market effects
of import competition in the United States.” American Economic Review 103:6 (2013) : 2121– 2168 [1].
Lowest quartile (least exposed)
Second quartile
Third quartile
Highest quartile (most exposed)
National versus regional impacts
Do the above results indicate that trade-impacted locations suffered employment declines
in absolute terms, or simply that they benefited less than trade-insulated locations?

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This distinction between relative and absolute effects matters: the former covers the
distributional effects of trade, whereas the latter deals with the magnitude of the net
gains from trade.
The above-mentioned 2016 study assesses whether the seemingly adverse industry and
regional impacts are offset by employment responses elsewhere in the economy [5]. The
study estimates that if import penetration from China had stopped increasing after 1999,
there would have been 560,000 more manufacturing jobs in the US through the year
2011. Actual US manufacturing employment declined by 5.8 million workers from 1999
to 2011, meaning the counterfactual job loss from direct Chinese import competition
accounts for 10% of the realized job decline.
Negative shocks to one industry are transmitted to other industries via economic linkages
between sectors. For example, rising import competition in the apparel and furniture
sectors will cause these “customer” industries to reduce purchases from the “supplier”
sectors that provide them with fabric, lumber, and textile and woodworking machinery.
Because customers and suppliers often locate near one another, trade-induced
employment impacts are likely to be transmitted via linkages to suppliers in the same
regional or national market, thus magnifying their aggregate effects.
When manufacturing workers lose their jobs or suffer declines in earnings they will reduce
their spending on goods and services. This contraction in demand spreads throughout
the economy, dragging down consumption and investment. Offsetting some of these
negative demand effects is the notion that workers who exit manufacturing may find jobs
elsewhere in the economy, replacing some of the earnings lost in trade-exposed industries.
Because aggregate demand and reallocation effect work in opposing directions, their net
impact can only be detected on aggregate employment.
Summing over both aggregate demand and reallocation effects, and considering both
those industries that are directly exposed to import competition and those that are
indirectly exposed via input–output linkages, the analysis in [5] finds that import growth
from China between 1999 and 2011 led to an employment reduction of 2.4 million
workers. There is little evidence to suggest, however, that employment gains in non-
exposed local industries substantially offset these losses. Indeed, the estimated
employment decline is actually larger than the 2.0 million job loss estimate when
considering only direct and input–output effects.
Wage and transfer impacts
Trade shocks impact more than just the employment margin in labor markets. Workers
in trade-exposed CZs experience larger reductions in average weekly wages [3], and these
impacts are concentrated among workers in the bottom four wage deciles [7]. Thus,
while trade theory has typically emphasized the wage impacts of trade shocks, analysis
finds that adjustments at the employment margin might have an even larger quantitative
impact on workers’ earnings [3].
A direct result of reduced employment and wages in trade-exposed local labor markets
is a rise in transfer benefits. Perhaps unsurprisingly, CZs that are more trade exposed
experience greater increases in per capita payouts of unemployment insurance and trade
adjustment assistance (TAA) (see the illustration on page 1, based on [1]), both of which
are designed to assist laid-off workers.

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This is not just a short-term issue: trade-induced declines in local employment and wages
appear to be persistent. As the illustration on page 1 shows, CZs that are more trade-
exposed see larger per capita growth in publicly provided medical care and government
income assistance, indicating that more households are qualifying for income-based health
benefits and meeting the threshold for welfare payouts. Trade exposure also contributes
to an increase in disability benefits, which are typically associated with permanent exit
from the labor force. And finally, retirement benefits also rise in more trade-exposed CZs,
suggesting that adverse labor market shocks induce more workers to retire early.
The impact of trade shocks on benefit take-up is sizable: per worker transfer receipts rise
by approximately $6 per capita for every extra $100 in local import exposure. Perhaps
even less expected are the categories of benefits in which these transfers accrue. TAA, the
federal government’s primary program to help workers who lose their jobs due to foreign
competition, offers extended unemployment benefits of up to 18 months, where eligible
workers may obtain allowances toward relocation, job search, and health care, as long
they remain enrolled in a training program. However, despite its intended purpose, TAA
has a negligible impact on easing local adjustment to trade shocks. Comparing a CZ at
the 75th versus the 25th percentile of trade exposure over the 1991–2007 period, the
findings show an average increased per capita take-up of TAA of only $0.23 in the more-
versus less-exposed CZ. By contrast, public spending on medical benefits, federal income
assistance, and social security retirement and disability benefits grew by more than $45
per capita in the more-exposed CZ, relative to the less-exposed one.
Worker-level impacts
Which types of workers bear the costs of trade adjustment—those employed by trade-
impacted firms? Or, are these effects felt equally by all comparably skilled workers
in a locality? In a frictionless labor market where workers move quickly across firms,
industries, and regions, wages should adjust uniformly within skill groups in response
to a trade shock, even if only a subset of industries or regions is directly exposed. If
worker mobility is imperfect across jobs and locations, however, trade shocks can have
heterogeneous impacts across workers within the same skill groups. Until recently, there
has been little evidence on how individual workers adjust to trade shocks.
A 2014 study uses longitudinal data from the US Social Security Administration to
analyze the impact of import competition from China on the careers of individual
workers [8]. Comparing workers with similar demographic characteristics and previous
labor market outcomes, but who differ according to the subsequent trade exposure of their
1991 industry of employment, those initially employed in subsequently trade-exposed
industries accumulate substantially lower earnings over the period 1992–2007. Although
workers who become trade-exposed due to initial industry affiliation move among jobs
at a higher rate than those who are not trade-exposed, this trade-induced job mobility is
shown to be insufficient to offset the difference in career earnings between more and less
trade-exposed workers.
Why do trade-exposed workers not fully recover earnings losses after changing employers?
One possible explanation is that job displacement devalues prior industry-specific human
capital, leaving affected workers poorly prepared for their new roles relative to non-
displaced workers. Ironically, workers may also suffer subsequent earnings losses because
they seek new positions in the industries where they currently possess specific skills—

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industries that remain exposed to import competition and hence may subject these
workers to further job displacement.
Although trade shocks affect both high- and low-wage individuals, there are substantial
differences between their patterns of adjustment. Workers whose pre-shock wages are
in the top earnings tercile of their age cohort respond primarily by relocating to firms
outside the manufacturing sector, and they do not lose earnings relative to their peers who
started out in less trade-exposed industries. By contrast, workers in the bottom tercile of
pre-shock earnings react by relocating primarily within the manufacturing sector, often
remaining in industries that are hit by subsequent increases in import competition. These
low-wage workers experience substantial differential earnings losses, as they earn less per
year both while working at the initial firm and after relocating to new employers.
Worker-level adjustment patterns in response to Chinese import competition have also
been studied for several EU countries, including Denmark, Norway, and the UK (e.g. [9]).
As in the US, earnings losses are concentrated among low-skilled workers. These results as
well as structural estimates of models with sectoral switching costs suggest that workers
in import-competing sectors incur differential adjustment costs in reaction to the China
trade shock, depending on initial industry and pre-shock wage levels.
A brief look at the positive side of international trade
These gloomy tidings from the labor market do not imply that trade integration, or
China’s rise specifically, have reduced US welfare—and even less so global welfare. On
the benefit side, there is no question that rising trade integration has lowered consumer
prices in the developed world. Recent work estimates that China’s entry into the World
Trade Organization in 2001 reduced the price index for manufactured goods in the US
by 7.6% between 2000 and 2006 [10]. Moreover, the expanded ability of firms in high
wage countries to offshore production to China may raise productivity for home-country
workers, lower the relative price of intermediate goods, and extend the range of final
goods that firms are capable of producing. And there is little doubt that China’s rise as
an exporter has been central to its extraordinary economic growth, which lifted 680
million Chinese citizens out of poverty between 1981 and 2010 [11]. The expansion of the
economic pie from these positives means that, in theory, all countries could compensate
those adversely impacted by trade integration to make all individuals better off.
LIMITATIONS AND GAPS
A key limitation of the evidence above is that it considers only the cost side of the cost–
benefit equation. While this evidence is unambiguous that workers, firms, and local
communities that are directly in the path of rapidly advancing international competition
suffer substantial and durable adverse adjustment costs, this article does not provide
analogous evidence on the gains experienced by consumers facing lower goods prices,
nor does it quantify the production and profit opportunities opened for domestic
multinationals. Concretely, it is hard to imagine Apple’s success in conceiving and
delivering wildly popular consumer products absent the capability of its primary Chinese
supplier, Foxconn, to manufacture these labor-intensive products at relatively low cost
and high quality. The correct interpretation of the evidence provided here, therefore, is
that rising international competition imposes concentrated costs on a subset of workers
and communities—not that this competition is harmful in net for a trading country.

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A second gap in understanding is that we know little about the dynamics of trade
adjustment. The US-based evidence above indicates that the adjustment process can
be sluggish, unfolding over a decade or longer. Recent work studying the labor market
effects of Brazil’s rapid reduction in import tariffs in the early 1990s presents an even
more troubling picture: alongside slow adjustment, the long-term consequences may
include permanently lower productivity, earnings, and formal sector employment in more
trade-exposed regions [12]. If this finding bears up broadly—and it is premature to say
whether it will do so—it adds urgency to understanding why trade-exposed areas tend
not to fully rebound, and to exploring the set of policies and local conditions that can
improve the speed and extent of rebound.
This last observation underscores what is perhaps the essential gap in our understanding
of the effect of trade on labor markets, which is an extraordinarily limited knowledge
of what policies “work” to facilitate trade adjustment, either at the individual level (e.g.
wage insurance or training programs), the local geographic level (e.g. subsidizing new
business formation or, alternatively, facilitating worker moves to new locations), or
the national level (e.g. adopting gradualism versus shock therapy in trade policy). Now
that research has unambiguously demonstrated that sharp changes in trade exposure
impose substantial adjustment costs on workers, firms, and surrounding communities,
it is incumbent on researchers and policymakers to think creatively, rigorously, and
experimentally—meaning, using the best tools of social science—to discern what policies
serve to maximize the shared gains from trade while minimizing the concentrated brunt
of adjustment costs on a subset of citizens.
SUMMARY AND POLICY ADVICE
While policy knowledge is lamentably incomplete, enough is already known to conclude
that there is no magic policy that can reap all of the benefits of trade integration while
fully shielding workers from the costs of trade adjustment. When industries contract—
due to either trade, technological advances, or even shifts in consumer tastes—workers in
those industries typically experience considerable economic losses.
Though rigorous evidence is quite limited, there are at least five policy levers that appear
promising for mitigating these costs and sharing the gains from trade integration more
broadly. First are well-designed trade adjustment assistant programs. In the US, for
example, the federal TAA program is difficult for workers to access and places artificial
strictures on their re-employment options. Making assistance more accessible, flexible,
and supportive rather than constraining of labor market re-entry would be a first
constructive step.
A second policy to consider is wage insurance. Workers displaced from career jobs
typically have trouble getting back into the labor market and are often understandably
reluctant to accept a new job at diminished pay and status. But waiting is costly. The
longer workers spend unemployed, the harder re-employment becomes. The simple idea
of wage insurance is to ease the economic and psychological pain of transitioning to
a new line of work. If a displaced worker must take a pay cut to find a job, a publicly
provided wage insurance policy would meet them part way. Workers may quickly move
up the wage ladder once re-employed, but if this does not occur, wage insurance affords
them months of enhanced pay while they make other adjustments.

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A wage subsidy that increases the rewards to otherwise low-wage work is a third policy
option. In the US, the Earned Income Tax Credit (EITC) is among the nation’s most
significant tools for reducing poverty and encouraging work. Receipt of EITC payments
is contingent on having work, and much evidence confirms that the EITC increases both
income and employment. But the EITC provides almost no cash assistance or employment
incentive to childless workers and non-custodial parents, many of whom are low-wage
men. Thus, the EITC excludes a group that is much in need. Expanding the EITC into a
generalized “earners’ credit” would assist workers whose earnings have been reduced due
to economic forces—such as trade exposure and technological displacement—outside of
their individual control.
Developed countries’ experiences with the China Shock also underscore the value
of gradualism as a principle for trade policy. There is a natural ebb and flow to labor
markets: as older workers retire and younger workers enter, industries are able to change
size without disrupting careers. But sharp labor market shocks that convulse entire
industries rush this gradual process, imposing steep transitional costs. In short, such
shock therapy is rarely wise as labor market policy.
Too often, policy is guided by untested assumptions, stylized economic theories that omit
critical details, and a selected set of historical anecdotes that may lack generality entirely.
Thus, a fifth policy that policymakers should almost universally embrace is rigorous
experimentation to learn what works. Policies should not only be well intentioned but also
explicitly engineered to be rigorously evaluated as they go into effect. Experimentation
may take the form of random assignment, a phased rollout of program benefits among
individuals or communities, or a set of crisp administrative rules that creates clear contrasts
in the extent or nature of treatment among different beneficiaries. Policy making is both
an art and a science, and the scientific component has advanced considerably over the
past decade, as randomized controlled trials have been widely deployed to evaluate
and improve economic and social policy. In trade policy, the stakes are high. Not by
coincidence, the opportunity for well-designed policy to improve individual and collective
outcomes is substantial.
Trade integration offers profound gains for all nations. Reaping them is a worthy policy
goal. Yet an appreciation for the concentrated costs trade adjustment imposes on a subset
of citizens should caution policymakers to proceed toward that goal with due care.
Acknowledgments
This piece draws extensively on papers co-authored with Daron Acemoglu, David Dorn,
Gordon Hanson, and Brendan Price. Sections of the text above are reproduced in whole
or part from [3]. The author acknowledges research support from the National Science
Foundation (SES-1227334) and the Russell Sage Foundation. He thanks Evan Soltas and
the editors of the IZA World of Labor for their assistance with preparation of this article.
Competing interests
The IZA World of Labor project is committed to the IZA Guiding Principles of Research
Integrity. The author declares to have observed these principles.
© David H. Autor

IZA World of Labor
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February 2018
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wol.iza.org 12
DAVID H. AUTOR
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Trade and labor markets: Lessons from China’s rise
REFERENCES
Further reading
Dauth, W., S. Findeisen, and J. Suedekum. “The rise of the East and the Far East: German labor
markets and trade integration.” Journal of the European Economic Association 12:6 (2014): 1643–1675.
Eaton, J., and S. Kortum. “Putting Ricardo to work.” Journal of Economic Perspectives 26:2 (2012): 65–90.
Utar, H. “When the floodgates open: ‘Northern’ firms’ response to removal of trade quotas on
Chinese goods.” American Economic Journal: Applied Economics 6:4 (2014): 226–250.
Key references
[1] Autor, D. H., D. Dorn, and G. H. Hanson. “The China syndrome: Local labor market effects of
import competition in the United States.” American Economic Review 103:6 (2013): 2121–2168.
[2] Krugman, P. R., and M. Obstfeld. International Economics: Theory and Policy (7th Edition). Boston,
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[3] Autor, D. H., D. Dorn, and G. H. Hanson. “The China Shock: Learning from labor market
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Online extras
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