Part 3. The trade deficit and jobs

what does the trade deficit mean for american workers?


There’s one reason we hear a lot about the trade deficit: jobs. The common argument is that reliance on foreign goods crowds out domestic employment. When Americans buy things from abroad, there is less consumption of homemade goods. Lower demand for American goods means fewer jobs to go around, particularly in the manufacturing sector.

It’s not a wholly unfounded story. Consider two facts about the health of America’s labor market.

The first is wage stagnation. As America’s trade deficit has grown over the last decade, manufacturing wages have barely budged. Monthly growth rates still lag behind pre-Great Recession levels. It appears, then, that the trade deficit is at least partly to blame. America’s thirst for foreign goods is putting downward pressure on workers.


Second, and more strikingly, there has been a sharp decline in total manufacturing jobs. Since 2001, the US economy has shed close to 5 million jobs across the manufacturing sector.


Here, too, there’s support for the idea that the trade deficit is to blame. Job losses have occurred at a time when US firms started offshoring more jobs and emerging markets began their dominance in many manufacturing industries.

Taking these two trends together, one could be forgiven for thinking the trade deficit was chiefly to blame. And yet economists are quick to point out that there’s another side to the story.

Focusing on manufacturing losses ignores a larger shift in the US economy. Jobs in the service sector rose sharply in recent decades. And, those gains outpaced losses elsewhere. Since 2001, jobs in services increased by more than 20 million – four times more than the manufacturing jobs lost over the same period. That’s a net gain of about 15 million jobs.

Job growth alone seems to suggest very little correlation between trade deficit and overall unemployment. After all, the US trade deficit is at an all-time high while unemployment rates in 2018 hovered around 50-year lows.

Clearly, the job numbers can be spun either way. Manufacturing statistics paint a grim picture and yet employment outcomes look good in the aggregate. How do we settle this debate?

One thing to keep in mind is that employment statistics don’t tell the whole story. Positive job numbers overlook the high costs of economic adjustment, particularly in America’s once-prosperous industrial centers. It’s no coincidence that there was so much focus on the Rust Belt during the 2016 election season. That portion of the United States has felt the adverse effects of globalization most severely. 

More generally, employment statistics don’t tell us anything about the “quality” of new jobs added to the US economy. There is some reason to be cautious. Employment in the so-called “gig economy” has been soaring over the last decade, with some estimating that 30-40% of the US labor force will be employed in the gig economy within the next two decades.

A roaring gig economy is a mixed blessing. We sometimes hear that younger generations prefer a more flexible labor market. However, there is mounting evidence that gig economy jobs are associated with less security and lower wages.

Taking a step back, then, the debate is hard to settle. In terms of raw job numbers, the evidence suggests that the US economy is doing just fine. But that might be hard to tell steel workers in the Rust Belt.

Ultimately, the question is not whether some jobs are lost due to economic adjustment. The question is whether domestic policies are in place to soften the impact of globalization’s blows. We will revisit that issue later in this series.