Report | Trade and Globalization

American Jobs and the Asian Crisis: The employment impact of the coming rise in the U.S. trade deficit

Download PDF

To view this report’s maps and tables, please download the PDF version.

The recent collapse of Asian currencies and financial markets will have severe economic consequences for the United States. A slowdown or shrinkage in domestic demand in the Asian nations affected by the crisis will force them to export their way out of their problems, and the impact will spread throughout the global economy. As a result, the U.S. merchandise trade deficit could increase from an estimated $200 billion in 1997 to $300 billion to $400 billion within the next 12 to 24 months.(1) This study analyzes the employment impacts of both a $100 billion and a $200 billion increase in the U.S. trade deficit, thus providing a range of estimates of the impact of the Asian crises on the U.S. labor market.

This study finds that, if the U.S. trade deficit increases by $100 billion to $200 billion, 700,000 to 1.5 million jobs will be eliminated in manufacturing and other tradable goods industries, and these job losses will occur in every state. Male blue-collar workers will be particularly hard hit. If these losses are not immediately offset with substantially lower interest rates from the Federal Reserve, unemployment will rise and gross domestic product will fall by 1.3% to 2.6%.

But even if the Fed could lower interest rates fast enough and far enough to prevent the national unemployment rate from rising at all – an extremely difficult task – an increase in the trade deficit of this magnitude would mean a rapid shift of 600,000 to 1.1 million jobs out of manufacturing and tradable goods industries into the lower-paying service sector. Substantial dislocation of families and disruptions in the nation’s communities would be unavoidable. Moreover, since service-sector jobs pay less than those in manufacturing, average wages will be reduced, thereby threatening a premature end to the recent upturn in wages at the bottom of the income distribution.(2)

Furthermore, even successful compensating action by the Fed would be unable to prevent a drop in GDP of 0.5% to 1.0% over the next two years, as the low-wage, low productivity non-traded goods sector expands to replace the high-wage jobs destroyed by rising trade deficits. Specifically, up to 119,000 high- and medium-wage jobs will be replaced by up to 119,000 low-wage jobs (in the bottom fifth); these replacement jobs will generate only $63 billion in GDP to offset a $100 billion increase in the trade deficit. Thus, average incomes will decline by at least 0.5% to 1.0% as trade deficits grow. Losses will be significantly larger if the Fed is unsuccessful at offsetting the effects of the Asian crisis.

The job dislocation effects of the increased trade deficit presented here are conservative, since they leave out several effects that will act to make the problem worse. First, we refer only to the direct and indirect effects of trade on employment, and do not include any of the potentially large and significant “multiplier effects” found in most macroeconomic models.The job effects estimated here include, for example, the impact on jobs in plants producing automobiles (direct effects) and in plants producing materials used to make automobiles (indirect effects), but not the effect of a drop in the sales of items that newly unemployed workers might otherwise have bought. Second, the estimates here assume that the crises in Asian currency and financial markets will stabilize quickly and that there are no further rounds of competitive devaluations in China or Japan. Finally, the assumption of successful offsetting policy from the Fed is optimistic. In the real world where people, firms, and governments interact, the Fed will be hard pressed to keep unemployment from rising, especially in the short run.

States will suffer job losses and severe dislocations
Figure 1 illustrates the gross impact of a $100 billion rise in the trade deficit on employment in the 50 states; Figure 2 shows the net effect assuming a completely successful offset policy by the Federal Reserve. (3) Table 1 provides specific estimates for each state of a $100 billion and $200 billion increase in the trade deficit, either of which would generate gross employment losses in all 50 states (see columns 1 and 3). Particularly hard-hit states include California; Texas; the industrial heartland states in the upper Midwest, such as Illinois, Michigan, Ohio, and Indiana; and apparel centers such as New York, Pennsylvania, and the Carolinas. California alone will lose more than 120,000 jobs. If the trade deficit increases by $200 billion, each of these regional effects will be doubled (column 3).

Even if the Fed perfectly manages interest rates to offset the trade deficit, 20 states will suffer a net loss of employment if the trade deficit rises by $100 billion (column 2). California, with its huge industrial base located on the Pacific Rim, will be hardest hit with 25,000 jobs lost, followed closely by North Carolina, with its large textile and apparel industries (20,000), Michigan (9,000), and Indiana (7,500). On the other hand, Florida will see the creation of about 50,000 jobs in non-traded goods (not shown), enough to more than offset a gross loss of 36,000 jobs and produce a net gain of 14,000 jobs. Employment in Florida and every other state will shift from manufacturing industries, such as electronics, to lower-paying service sectors. Thus, even states that report net gains in columns 2 and 4 will still experience substantial job displacement, and some communities and areas in each state will grow while others suffer.

Widening trade deficit will severely damage manufacturing industries
If the U.S. trade deficit increases by $100 billion, then 1.1 million job opportunities will be eliminated in the domestic economy, as shown in the first column in Table 2. (4) These job losses will begin to accumulate by mid-1998, rising sharply thereafter as the trade deficit expands. The full effect will likely take hold over the next 12 to 24 months (through the end of 1999), and 70% of job losses will be concentrated in the manufacturing sector. Within manufacturing, the largest losses in absolute terms (column 1) will occur in industrial machinery (169,000 jobs lost, representing 8.1% of total employment in the sector), which includes computers and other office machinery, and in electronic equipment (122,000 jobs lost). These sectors will be hard hit because of their size and because of the direct, often intense, price competition between domestic and foreign producers. These industries are particularly important as key centers of high-tech, high-wage employment.

Other hard-hit sectors within manufacturing will include apparel (65,000 jobs), textile mill products (33,000), transportation equipment (48,000), and miscellaneous manufacturing (32,000). (5) Outside of manufacturing, the agricultural sector will also be significantly af
fected, with losses of 35,000 jobs or roughly 1% of total agricultural employment. Job losses in trade and services will be large in numerical terms but not as a share of total sectoral employment.

If the U.S. trade deficit increases by $200 billion, the impacts will be much larger. Nearly 1.5 million manufacturing jobs will be lost (Table 2, column 2), 7.9% of total manufacturing employment in 1996 (column 4). Losses of this scale would induce depression-like conditions in manufacturing communities, on a scale approaching the Rustbelt disaster of the early 1980s.

Fed intervention cannot protect traded goods industries
Table 3 reports the results of an assumption that the Fed will be able to reduce interest rates so precisely as to completely offset the overall employment effects of larger trade deficits, leaving overall employment unchanged (as indicated by the total of zero net job loss in columns 1 and 2). Even so, there will be substantial shifts in employment between sectors and regions. If the U.S. trade deficit expands by $100 billion, then manufacturing employment will fall by 569,000, 22% less than before adjusting for Fed actions but still substantial. Industrial machinery, electronic equipment, apparel, and transport equipment are still the most heavily affected sectors, losing 3% to 8% of total employment even when overall unemployment levels are unchanged.

This Fed-intervention scenario shows non-traded goods production growing rapidly to absorb the excess labor that will result from trade deficits. Employment in services increases by 198,000 (column 2), the government sector adds 153,000 employees, and trade (wholesale and retail) adds 114,000. In addition, net job losses in agriculture are substantially smaller than in Table 2, as increased income stimulates food demand and output.

If the U.S. trade deficit increases by $200 billion (Table 3, columns 2 and 4), the Fed’s job will become much more difficult. Even if the Fed policy is successful, there will be much larger changes in the composition of employment than in the $100 billion case. The manufacturing sector will shrink by 6.2%, while employment in services, government, and the finance sectors will increase by 1.2% to 1.6%. Again, most jobs in these sectors pay substantially less than those in traded goods industries.

Trade deficit will hit high-wage, non-college workers harder than others
Table 4 (previous page) shows the impact of increasing trade deficits on different groups of workers. Men will lose 639,000 to 1,278,000 jobs if deficits increase $100 billion to $200 billion (columns 1 and 3), 61% of total loses. Male workers are only 53% of the labor force, but since they make up a greater share of total employment in manufacturing they will suffer most heavily from a trade shock. While there are no great disparities in job loss by ethnicity, there are clear trends in the impact on workers by education and wage level. College-educated workers will lose 180,000 jobs (17% of total losses) with a $100 billion trade deficit, but they make up 19% of the labor force. Workers with less than a high school education will lose 228,000 jobs (22% of total losses), but they make up only 19% of the labor force. On the other hand, 25% of the jobs destroyed will be of the high-wage variety, while only 21% of jobs in the economy fall into this group. At the bottom of the wage ladder, only 31% of the jobs destroyed will be in the low-wage category, although such jobs make up 36% of the economy. For a $200 billion deficit, the number of jobs lost in each category double, while the shares remain the same.

These results show that an increase in U.S. trade deficits will eliminate relatively more high-wage jobs, especially for workers with less than a college education, and these workers will bear the brunt of the economic dislocation that will result from bigger trade deficits. Manufacturing and other traded goods industries employ a larger-than-average proportion of non-college-educated production workers, yet, for reasons that include the high productivity of manufacturing relative to other sectors of the economy, these sectors pay their workers better-than-average wages.

If the Fed is able to prevent an increase in unemployment, the new jobs will offset lost jobs to leave little or no differential impact on employment by ethnic group. However, with a $100 billion deficit, workers with a college education (either a degree or some college) will gain 59,000 jobs.(6) Workers with a high school degree or less will suffer an equivalent net loss of jobs.

Even though bigger trade deficits will increase demand for college-educated workers — if the Fed keeps unemployment rates steady — there will still be a net loss of high- and medium-wage jobs. Job gains will primarily be those paying lower wages: the bottom quintile of the labor force will see a net increase of 59,000 jobs (column 2). Therefore, the increase in demand for college-educated workers will be concentrated in lower-paying positions. This finding illustrates the continuation of a previously noted trend: even while the share of college graduates in the labor force rises, shifts in labor demand are primarily creating jobs with below-average wages (Mishel, Bernstein, and Schmitt 1997).

Appendix — Methodology

Throughout this report, we use the Bureau of Labor Statistics’ 183-industry categorization of the U.S. economy. We use 1995 final demand data as the baseline for changing trade and for macroeconomic effects (BLS 1997b). We assume that the currency crises throughout Southeast Asia will cause the U.S. trade deficit to grow by $100 billion and $200 billion (see Hale 1997; The Economist 1997).

The last similar period of appreciation of the U.S. dollar was in the early 1980s. Between 1981 and 1985, real U.S. imports increased by 50%, while real exports fell by 6%. We consider the industry-level changes in imports and exports, using data from the Bureau of Labor Statistics, Office of Employment Projections (BLS 1997b), and assume that the current expansion of trade will be distributed among industries in the same pattern. If trade in each industry were to change by the same fraction as it did in 1981-85, the trade deficit would rise by over $762 billion, which is unrealistic. Thus, to yield an increase in the trade deficit of $100 billion we scaled the change back by a constant multiple of 0.131. In other words, the percentage changes of exports and imports in each industry are expected to be 13.1% as large as they were between 1981 and 1985. In aggregate, then, exports are expected to increase by a modest 0.3% and imports to balloon by 11.7%. In the $200 billion scenario we use a multiplier of 0.262, producing export growth of 0.7% and import growth of 23.5%.

To estimate the employment impacts of the increased trade, we use the 1995 input-output package – the most recent version available – from the Bureau of Labor Statistics’ Office of Employment Projections. (7) This package includes an input-output table, derived from BLS calculations of the number and types of jobs supported by production in each industry. The table reflects not just the direct labor requirements of manufacturing production, but also the indirect employment in non-manufacturing industries (like business services) that supply manufacturers.

Labor content studies of this type typically measure job opportunities, rather than jobs, for two reasons. First, in a growing economy we expect a certain level of background employment growth. In this situation, increases in trade deficit
s may lead to lower job creation than would otherwise occur, without producing actual declines in employment. Second, some particular imported products are not produced in the U.S., so increases in their consumption do not directly displace domestic workers. However, employment in manufacturing has been declining in absolute terms since 1995, and is likely to decline even more rapidly in 1998 and 1999 as a result of the unexpected increase in trade deficits discussed in this report. Therefore, the terms “jobs” and “job opportunities” are used interchangeably in this analysis.

Offsetting Fed Policies
In several calculations, we include an assumption that the Federal Reserve Bank will intervene in the economy — by lowering interest rates – to offset the effects of rising trade deficits. This matches the conventional wisdom: prior to the Asian financial crisis, economic forecasters were widely predicting that the Fed would raise interest rates in 1998. However, many of these forecasters have recently revised their interest rate forecasts sharply downward, and now conclude that rates will stay constant or fall in the next year (Berry 1998). Our model of a net interest rate reduction in response to the crisis is an equivalent counterfactual scenario, in the context of a constant demand model. As a result, final demand less net exports (exports minus imports) increases just enough to keep unemployment unchanged. A $63 billion increase in non-trade final demand is required to offset a $100 billion increase in the trade deficits. We model this as a uniform 0.83% expansion of all non-trade final demand. The increase in non-trade final demand is smaller in dollar terms than the decrease in net exports because fewer dollars of spending are required to generate a given number of jobs in non-traded goods sectors (i.e., services) than in traded goods (such as manufactured products). Traded goods sectors pay higher wages and are more capital intensive than other sectors of the economy; therefore, fewer jobs are generated per dollar of final demand (see Scott, Lee, and Schmitt 1997).

State and Demographic Effects
We assume that job gains or losses in each of the 183 industries are distributed among the states in the same proportions as total employment. Data on total employment by state and industry come from BLS (1997c). Similarly, we assume that the casualties and beneficiaries in each industry are demographically similar to that industry’s overall workforce; we use Census Bureau data (from the Public Use Microdata Sample of the 1990 Census) for this demographic information. See Rothstein and Scott (1997a and 1997b) for more information.


Technical Notes
(see PDF version of this report for technical notes and formula)

1. Several economists have forecast a $100 billion increase in the merchandise trade deficit. For example, in testimony before a House Banking subcommittee, David Hale stated that “it is not difficult to imagine the U.S. trade deficit expanding to the $250 [billion] to $300 billion range by early 1999 from $192 [billion] in 1996” (Hale 1997). Fred Bergsten told The Economist that an upcoming study by the Institute for International Economics predicted the deficit to grow by $100 billion in 1998 alone (The Economist 1997). These estimates (Hale’s in particular) were made before the full extent of the crisis was known, and it is possible that the ultimate effect will be even greater. Thus, the estimates in this paper also include the effect of a $200 billion increase in the trade deficit. (RETURN TO TEXT)

2. EPI analysis of Current Population Survey outgoing rotation group (ORG) data has shown that wages in the lowest decile of workers began to rise in real terms in 1997 over the previous year (see Webster 1997 for details on the methodology behind these unpublished calculations). However, real wages for this group remain 16% below those of workers in the lowest decile in 1979. (RETURN TO TEXT)

3. The models and data sources used in this analysis are described in the appendix.  (RETURN TO TEXT)

4. The relationship between jobs and job opportunities is discussed in the
appendix. (RETURN TO TEXT)

5. Significant job losses are also predicted for footwear, especially as a share of current employment. However, this particular estimate probably overstates the role of trade, since by 1996 imports had largely captured the likely market in this sector. Unlike in 1981-95, there is now little domestic employment in this sector. These sectoral job losses, 2.5% of the total, will be spread over the other traded goods sectors. Therefore, other sectoral job impacts will be proportionately (up to 2.5%) larger. (RETURN TO TEXT)

6. The net demographic impacts of a $200 billion increase are, in general, twice as large as those of a $100 billion increase. (RETURN TO TEXT)

7. See Franklin (1997) and related articles as referenced on the BLS Office of Employment Projections web site. (RETURN TO TEXT)

8. See PDF version for technical notes endnote.

9. See PDF version for technical notes endnote.

Berry, John. M. 1998. “Eyes on Fed amid talk of rate cut.” The Washington Post, January 13.

Council of Economic Advisors. 1997. Economic Report of the President. February. Washington, D.C.: U.S. Government Printing Office.

The Economist. 1997. “The Asian effect.” January 17, pp. 23-34.
Franklin, James C. 1997. “Industry output and employment projections to 2006.” Monthly Labor Review, November, pp. 39-57.

Hale, David. 1997. “The East Asia financial crisis and the world economy.” Testimony before the House Subcommittee on Domestic and International Monetary Policy, November 13.

Mishel, Lawrence, Jared Bernstein, and John Schmitt. 1997. The State of Working America 1996-97. Economic Policy Institute Series. Armonk, N.Y.: M.E. Sharpe.

Rothstein, Jesse, and Robert E. Scott. 1997a. “NAFTA and the states: job destruction is widespread.” Issue brief. Washington, D.C.: Economic Policy Institute.

Rothstein, Jesse, and Robert E. Scott. 1997b. “NAFTA’s casualties: employment effects on men, women, and minorities.” Issue brief. Washington, D.C.: Economic Policy Institute.

Scott, Robert E., Thea Lee, and John Schmitt. 1997. “Trading away good jobs: an examination of employment and wages in the U.S., 1979-94.” Briefing paper. Washington, D.C.: Economic Policy Institute.

U.S. Department of Labor, Bureau of Labor Statistics. 1997a. Employment and Earnings. January. Washington, D.C.: U.S. Government Printing Office.

U.S. Department of Labo
r, Bureau of Labor Statistics, Office of Employment Projections. 1997b. Employment Outlook: 1996-2006 Macroeconomic Data, Demand Time Series and Input Output Tables. November. Washington, D.C.: U.S. Government Printing Office.

U.S. Department of Labor, Bureau of Labor Statistics. 1997c. ES202 Establishment Census. Washington, D.C.: U.S. Government Printing Office.

U.S. Department of Labor, Bureau of Labor Statistics, Office of Employment Projections. 1997d. Unpublished data from upcoming Employment Projections. Washington, D.C.: U.S. Department of Labor.

Webster, David E. 1997. “Wage analysis computations.” In Mishel et al. (1997), pp. 423-6.

The tables, maps, and technical notes referenced in this report can be downloaded in Portable Document Format (PDF).

For a printable PDF version of this report,  click here.

See related work on Trade deficit | Trade and Globalization

See more work by Jesse Rothstein and Robert E. Scott