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New deliverable: Impacts of import competition on labour market outcomes and well-being of workers (D4.2)

This report consists of two papers. Both papers deal with worker responses to import shocks in Western European countries, Germany and The Netherlands respectively. Both papers consider the effects of the sudden emergence of China as a major exporter and Eastern European countries becoming a member of the European Union. These two major changes in the world economy happened virtually simultaneously (in the first decade of the 21st century) and had profound impacts on the global division of labour. It is well-known that the overall welfare effects of increased trade are positive, mainly because it leads to lower prices. However, especially the “China shock” has strengthened the notion that the gains from trade are generally not equally distributed over the members of society. A by now large literature has found that the comparative advantages of China and Eastern Europe have had negative consequences for specific groups of workers in advanced countries, like the United States and Germany. In particular, low- skilled and medium-skilled workers with routine-intensive jobs in manufacturing industries suffered.

A question of major relevance for policy-makers is how to deal with this situation, in which the overall effects of increasing globalisation are positive, but substantial parts of society are hurt by it. Adopting protectionist policies might support those who are negatively affected, but at the expense of everyone else. Continuing to support initiatives for more trade liberalisation might have welfare-enhancing effects, but would increase inequality within countries.

One way to address this policy problem is to make the workers who have jobs that might be competed away more resilient, by adopting domestic policies. These policies should mitigate the effects of two sources of inflexibility, barriers to relocate to places with more favourable employment opportunities and barriers to switch to occupations that are less susceptible to the negative consequences of strong import competition. Policies in various domains (such as housing, pension systems and education) could be implemented to make it easier and more attractive for workers to adapt to problems associated with import shocks. Unfortunately, the literature has remained rather silent so far on studying how workers who adapted (despite the existing barriers) to import shocks by moving to different regions or switch into different occupations fared, after their adaptation decision. Did they earn higher wages than workers hit by import shocks who decided to stay put? Are they more satisfied with their jobs than otherwise comparable workers who did not adapt? Answers to questions like these are essential in gaining insights into the potential impacts of implementing policies that aim at reducing the barriers to adaptation that exist. The two papers in this report provide some first evidence.

The first paper, by Konietzny and Los, focuses on Germany. As opposed to the vast majority of the existing literature, exposure to import competition is not quantified based on the industry in which a worker is employed, but based on the type of business function (R&D, marketing, management or fabrication) he/she performs. The idea behind this choice is that production processes became organized as Global Value Chains (GVCs), in which countries specialize in functions within industries. An R&D worker in the German car manufacturing industry is much less exposed to imports of cars from Eastern Europe than a German fabrication worker in that industry, given that Eastern Europe (and also China) specialized in performing fabrication activities rather than R&D. We then determine regional exposure by function based on the employment composition of the region considered. The paper links these new import competition indicators to worker-level data, which includes information on the region someone is working, their occupation, their labour earnings and their job satisfaction, next to many individual characteristics like age, gender, etc. The paper finds that high degrees of import exposure made workers more likely to move to another region and switch function. Both effects are substantial, but the degree of switching functions only increased with a lag. The paper also finds that workers who choose to move to another German region following a trade shock could offset the negative impact on their earnings and job satisfaction. In fact, moving resulted in higher wages and greater job satisfaction compared to staying put. Workers who switched to a new function also increased their earnings, but did not improve their job satisfaction compared to those who remained in the same function.

The second paper, by Peijen, Kraan and Los, deals with workers in The Netherlands and is complementary to the first paper. It does not address the consequences of adaptation by workers by relocating to other regions, but contains much more detail about switching from one occupation to another, if compared to the first paper. The exposure to import competition indicator is similar to the one used in the first paper. The worker-level data come from the Dutch Labour Supply Panel. The paper identifies a group of workers that decided to switch occupations. The data does not allow us to be certain that they did this because they feared import competition, but the stated reasons for switching occupations are those that are relevant if import shocks occur (like switching because of job security concerns or closedown of the establishment). Propensity Score Matching techniques are then applied to identify a group of workers who are similar in background characteristics to these occupation switchers, but who chose to stay in their jobs instead. The findings show that (1) there is no significant short-term effect (up to two years later) ofchanging occupations on wages, but (2) there is a positive effect on job satisfaction. In the short run, import shocks themselves (independent of whether workers adapted or not) did not have an impact on wages and job satisfaction. However, in the long run (up to six years later), we observe no significant impact of moving occupations on either outcome variable. These findings might reflect the fact that The Netherlands (as opposed to Germany) is an economy that is mainly based on services industries. Consequently, import shocks have less of an impact on labour market outcomes.

The papers provide some first indications of how adaptation to import shocks affects labour market outcomes and well-being of workers in Western European countries. For The Netherlands, we do not find much evidence that adapting to import shocks in the decade of rapid globalisation (2000-2010) by switching occupations yields better outcomes. For Germany, we find that adapting buy either relocating to other regions or switching from performing one business function to performing another tended to have positive effects. It should be emphasized, however, that much more work needs to be done before really firmconclusions can be drawn. Especially for the study regarding Dutch workers, the sample sizes are small. The fact that the findings of the two papers are not always aligned could be due to differences in approach (imposed by differences in data availability), but might also be caused by structural differences between the German and the Dutch economy. Finally, analyses focusing on wage income and job security do not tell the full story. Ideally, one would also analyse the effects on life satisfaction and other measures of broad well- being. Especially moving into different regions can have negative effects in this respect, if it implies that one moves to places distant from where social networks were formed before moving. Lack of data prevented us from analysing important issues like these.

You can read “Impacts of import competition on labour market outcomes and well-being of workers (D4.2)” in the following link.