Abstract
Abstract Using employee-employer matched data, I analyze the impact of a low-wage trade shock on manufacturing workers in a high-wage country, Denmark, and how they adjust to the shock over a decade. I derive causal effects by exploiting the dismantling of the Multifiber Arrangement quotas on products from China upon its WTO accession as a quasi-natural experiment and use within-industry, within-occupation heterogeneity in workers’ exposure to this shock. I find significant negative long-run effects on earnings and employment trajectories and identify job instability in the service sector as a main adjustment friction, concentrated among workers with manufacturing-specific education and occupation. The results establish the importance of specific human capital in trade adjustment and provide evidence of skill upgrading as workers rebuild lost human capital through education.
Highlights
MANUFACTURING jobs, once the main income source for the middle class, are waning, and this causes considerable anxiety in advanced countries
What options are available to manufacturing workers when facing low-wage import competition? Are the possible paths of adjustment different for workers depending on their individual investments in human capital, reflected in their education and occupation, and how do these differences affect the cost of adjustment?
The analysis addresses whether workers in the labor market experience decline in earnings due to the shock and if this is through decline in hourly wages or reduced hours worked, or both
Summary
MANUFACTURING jobs, once the main income source for the middle class, are waning, and this causes considerable anxiety in advanced countries. I study the impact of a Chinese import shock on workers’ earnings and employment trajectories in a high-wage country, Denmark, and study workers’ adjustment in a quasi-natural experiment that measures the causal effects of a trade policy change affecting a classic manufacturing industry. Since Becker (1964), studies focus on human capital that may be specific to firm, industry, and occupation (Topel, 1991; Neal, 1995; Parent, 2000; Poletaev & Robinson, 2008; Kambourov & Manovskii, 2009) This literature either looks at plant closings regardless of reason or focuses on job switches that are endogenous to characteristics of workers and their employers. This paper shows the first direct evidence that trade with low-wage countries can lead to skill upgrading at the individual level, thereby potentially increasing the supply of skill.
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