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Assist Workers Displaced by Foreign Competition?

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Dan Drezner has a nice analysis [2] of “The Outsourcing Bogeyman” in the May/June issue of Foreign Affairs. In it, he offers several sound reasons, each backed by facts, why so-called outsourcing – that is, importing services – is nothing to fear.

But even Drezner concedes that “offshore outsourcing deserves attention and that some measures to assist affected workers are called for.”

I agree that such measures might be justified as a means of avoiding protectionism. But let’s look more closely at the economics, ignoring the political-expediency justification for such measures.

Special government assistance to workers who lose their jobs to foreign trade would discriminate against workers who lose their jobs to other forms of economic change. When consumers shift some of their spending from American firm X to Foreign firm Y, this shift is a species of economic change. But the same is true when consumers shift their spending from American firm X to American firm Z. In both cases, workers of American firm X are harmed.

Government assistance to workers who lose their jobs to foreign trade is a subsidy to firms that face some prospect of foreign competition. Such assistance enables these firms to offer employment packages (wages plus fringe benefits) of lower dollar values than otherwise to their employees. That is, part of the full costs of hiring workers will be picked up by government in the form of promised help to displaced workers. The greater the likelihood of a domestic industry confronting foreign competition, the greater the value of the subsidy to firms in that industry and, hence, the greater the difference between the dollar value of the employment packages that these firms would offer without the subsidy and the dollar value of the packages that they offer with the subsidy.

Firms in these industries, not having to pay the full costs of the labor they hire, will hire more labor than they would hire without the subsidy. Thus, the number of workers who, over time, actually do lose their jobs to foreign trade will be greater than it would be without such subsidies.

One way of avoiding this bias (that shifts employment from industries less likely to face foreign competition to industries more likely to face foreign competition) is for government to provide adjustment assistance to all workers who lose their jobs because of economic change. But I foresee several problems with this policy, one significant one being the following: Politics being what it is, workers who lose their jobs to foreign competition will nevertheless still press for protectionism or extra government assistance – assistance over and above what workers not subject to foreign competition receive.

In addition, of course, government subsidies to employers entail all the usual problems with government subsidies – the list of which I’ll leave the reader to make.

At the end of Drezner’s Foreign Affairs article, he mentions the possibility of private insurance against job losses to outsourcing. Such insurance would be preferable to government subsidies.

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