In addition to the possibility of saving in anticipation of possible job losses – that is, for stretches of those “rainy days” that we’ve been warned of since childhood – most workers today have a range of choices of jobs, with these jobs differing in the prospects they contain for their holders being laid off because of foreign competition. And even if not all workers are aware that, say, jobs in steel mills are more likely to be destroyed by trade than are jobs, say, in aviation maintenance, if only some workers become aware of this fact – or suspect it with sufficient seriousness – the supply of labor for steel mills will fall relative to the supply of labor for aviation maintenance. One result will be a rise in the wages paid to steel workers relative to the wages paid to aviation-maintenance workers. These higher wages for steel workers compensate them for their greater likelihood, compared to that of aviation-maintenance workers, of losing their jobs to imports.
In short, the market has a built-in adjustment mechanism that at least partially compensates workers ahead of time for holding jobs that are at unusually high risk of being destroyed by imports. Because this ‘compensating differential’ operates in labor markets, when the government gives special assistance to workers who are laid off because of imports, one result is that these workers wind up being overcompensated.
But the economic consequences extend further. Such special assistance eventually attracts into these ‘at risk’ jobs more workers than would otherwise be attracted into those jobs. As a consequence, the wages for these ‘at risk’ jobs fall, thus wiping out the compensating differentials in the wages of steel workers relative to the wages of aviation-maintenance workers. The final result is an imposition – an “externalizing” – on taxpayers of part of the cost of owning and operating steel mills. I can see no reason why a high likelihood of facing vigorous competition from imports should entitle a business to government subsidies.
Too much of the discussion about job destruction and worker transition rests on the questionable assumption that all actors in markets, including workers, are either myopic or quite unintelligent (or both).
When analyzed carefully, the case for government assistance to help workers who lose jobs to imports is revealed as being quite weak.