A growing body of academic research shows the U.S. workforce was hit harder than expected by trade with China and was potentially unprepared for the shock. As import competition surged and displaced manufacturing workers, the U.S. labor force itself was becoming less adaptable, and political blowback was brewing.
Here is a summary of some of the most important new research in these areas:
Less Flexible Labor Markets
U.S. workers and firms have long been known among scholars and policy makers for being flexible and able to adapt to shocks and changes in the economy.
But some researchers suggest that labor markets have become less dynamic since 2000, and even more so since 2007, making them less adaptable just as the shock of trade with China hit and then worsened.
1. In “Understanding Declining Fluidity in the U.S. Labor Market,” written in March 2016,Raven Molloy, Christopher Smith, Riccardo Trezzi and Abigail Wozniak document declining dynamism in the job market. That means fewer people switching jobs, moving in and out of the labor force and moving from one state to another, and fewer companies creating and extinguishing positions.
The Fed analysts say the trend dates back to the early 1980s. Their measure of fluidity has dropped 10% to 15% since then. This is partly due to an aging population and two-worker families keeping people in place.
The trend also might be associated with fraying social fabric in communities. States with large decreases in the fraction of the population who report that strangers can be trusted tend to have large declines in labor market fluidity.
In other words, job searches and hires might be getting tangled up because people don’t trust each other. Workers also are renegotiating wages less often.
2. In “Labor Market Fluidity and Economic Performance,” delivered at the Federal Reserve’s Jackson Hole, Wyo., conference in August 2014, economists Steven Davis andJohn Haltiwanger find a shift away from young firms that create new jobs.
Firms no more than five years old accounted for 19% of employment in 1982, and then 14% in 2000 and 11% in 2011. In the 1980s and 1990s, the drop was dominated by young retail firms, likely being squeezed by big-box retailers.
After 2000, there was a switch: a large decline in high-tech startups. Those “young, entrepreneurial firms…were a major source of innovation and productivity growth for the economy as a whole in the 1980s and 1990s,” the economists said.
They found that lost labor-market dynamism has been hardest on younger and less-educated workers. The economists say regulations, including occupational-licensing rules and worker protections meant to prevent discrimination based on age, gender, race and religion, contribute to less-dynamic labor markets.
3. In “The Secular Decline in Business Dynamism in the U.S.,” from June 2014, Ryan Decker, John Haltiwanger, Ron Jarmin and Javier Miranda find that firms have become less responsive to outside shocks. “This has potentially adverse effects on industry-level productivity growth since there has been a slowdown in the pace at which resources are being reallocated from low- to high-productivity businesses,” they wrote.
4. In “Locate Your Nearest Exit: Mass Layoffs and Local Labor Market Response,” September 2015, authors Andrew Foote, Michael Grosz and Ann Stevens look at how workers respond to mass layoff events.
Since the Great Recession, a greater number of people have tended to drop out of the labor force in response to mass layoffs, while fewer people have moved to other places in search of new jobs, the researchers concluded.
Moreover, the percentage of the population that moved in response to mass layoffs in search of better jobs declined after the recession.
5. Kerwin Kofi Charles, Erik Hurst and Matthew Notowidigdo, in “The Masking of the Decline in Manufacturing,” find that the decline in U.S. manufacturing led to a reduction in demand for less-educated workers between 2000 and 2006.
For a few years, the housing boom masked the effects of the manufacturing decline for less-educated workers as men found jobs in construction. But when the housing market collapsed in 2007, there was a large, immediate decline in employment among such workers, who faced the sudden disappearance of jobs related to the housing boom and the fact that manufacturing’s steady decline in the early 2000s left them with many fewer opportunities in that sector than at the start of the decade.