Trade, immigration and robotization: A trifecta of pain and prosperity

The key to success most likely lies in more vigorous attempts to reduce the barriers to self-employment and entrepreneurship among the low skilled.

WELDING ROBOTS surround the body of a VW Golf car in a production line at the plant of German carmaker Volkswagen in Wolfsburg, Germany earlier this year. (photo credit: REUTERS)
WELDING ROBOTS surround the body of a VW Golf car in a production line at the plant of German carmaker Volkswagen in Wolfsburg, Germany earlier this year.
(photo credit: REUTERS)
The recent political upheavals in the United States, Great Britain and perhaps next in France are often bundled into one perplexing package. The election of US President Donald Trump, Brexit and the rise of Marine Le Pen in France are widely believed to be a popular revolt against the entrenched ruling elites. But what lies at the core of this anti-establishment fervor? Is it driven by a sudden resurgence of xenophobia, racism and identity politics? Or is it more about the economic pain and suffering of a substantial segment of the population, who are crying out for better solutions to vexing social problems? While no definitive answers have yet emerged, or may ever be found, there is a growing body of evidence that sheds light on the economic issues central to the debate.
Especially noteworthy are the recent findings of economist David H. Autor and his co-authors, who have made considerable progress in quantifying the social costs of trade with China.
After World War II, most economic research did not uncover any significant downside to ever-increasing globalization. International trade appeared to be a win-win proposition for all involved, as basic economic theory would suggest. However, when China opened its doors to the world economy in the 1980s, globalization began to take on a whole new meaning. Of all manufactured goods that were exported worldwide, those coming from China increased from only 2% in 1991 to an astounding 19% by 2013.
In their paper, “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade,” Autor and his co-authors calculate that Chinese exports to America account for a whopping 44% of the employment decline in American manufacturing between 1990 and 2007. Moreover, for every increase in Chinese imports of $1,000 per worker, the American worker experiences an average reduction in annual income of approximately $500.
The reason for these strong adverse effects of trade with China lies in the fact that manufacturing activity is often geographically concentrated, as in America’s Midwest.
Regions that relied to a large extent on manufacturing lacked locally growing industries that could have absorbed the lower-paid and displaced workers. American workers that were harmed by trade with China also seemed unwilling or unable to relocate to different regions that were prospering.
Given that there is now credible evidence that international trade in manufacturing goods has caused long-term suffering among lower-skilled workers in the United States, could it be that the same adverse effects emerge as the result of international “trade” in people? That is, do immigrants also depress wages and displace workers in a similar fashion? In a recent book entitled, We Wanted Workers: Unravelling the Immigration Narrative, the Cuban immigrant economist George Borjas argues that, analogous to international trade in goods, immigration has created many winners, but also a considerable share of losers.
On the losing side, his own calculations suggest that natives who lack a high-school diploma could face more than a 10% reduction in wages because of competition with low-skilled immigrants.
Of course, wage depression due to immigration is not necessarily a bad thing. It can lead to cheaper goods and services for the population. But, as in the case of lower- priced imports, the extent of the net benefit to immigration is crucially dependent on the ability or willingness of affected parties to retrain or relocate. Both retraining and relocating are apparently easier said than done.
The third major economic factor often hypothesized to be a source of economic despair among the lower-skilled is automation and robotization. In a recent research paper entitled, “Robots and Jobs: Evidence from US Labor Markets,” the economists Daron Acemoglu and Pascual Restrepo quantify the negative effects of robots on lowskilled workers in America. They find that robots are to blame for up to 670,000 lost manufacturing jobs between 1990 and 2007.
For every robot per thousand workers, 6.2 workers lose their jobs. Moreover, wages can fall by as much as 0.7% for every additional robot per thousand workers.
As with international trade in goods and people, robotization is not associated with substantial increases in employment in other occupations and locations. Interestingly, robots affect both male and female employment, but the negative effect on male employment is nearly twice as large.
The researchers speculate that this may arise because women are more willing to take a pay cut or shift to a lower-status field than men. In any case, the situation will only get worse for both genders as the use of industrial robots is expected to quadruple in the near future.
Unfortunately, the most recent evidence clearly suggests that low-skilled workers in America are getting hit hard by a trifecta of trade, immigration and robotization. Similar forces are undoubtedly affecting the economies of Great Britain, France and the rest of the industrialized world. While it would be foolish and self-defeating to seal borders and put a halt to technological innovation, the painful side effects of globalization and innovation need to be more widely acknowledged and more seriously addressed.
It is also important to realize that the standard solution offered by establishment politicians, to tax and redistribute wealth, has not sufficiently averted the economic hardship to date, and doubling down on failed policies might only make things worse. Perhaps this is because people really seek pride in hard work and the hope of economic advancement, rather than receiving handouts or charity.
A source of optimism is that once the populist politicians have replaced the establishment elite, and still fail at reducing the economic pain and suffering, maybe then truly creative market-oriented solutions will finally be pursued. The key to success most likely lies in more vigorous attempts to reduce the barriers to self-employment and entrepreneurship among the low skilled. If this mantle is not eventually taken up, then the recent political upheavals may only be the tip of a very sharp iceberg.
The author is a professor of economics at the University of London, Royal Holloway College and president of the Jerusalem Institute for Market Studies.