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Pittsburgh Tribune-Review: “What free trade really does”

In my column for the October 20th, 2011, edition of the Pittsburgh Tribune-Review, I wrote about an essential feature of free trade’s effect on employment. You can read my column beneath the fold.

What free trade really does

There are many good economic arguments for free trade. It intensifies competition. It enables producers worldwide to specialize in tasks for which each enjoys a comparative advantage. By expanding markets, free trade makes it possible for more and more industries to cut costs by taking advantage of economies of scale. All in all, free trade makes us more prosperous. It even discourages military hostilities.

But the most common argument of pro-free-trade politicians and pundits is wrong: Free trade does not “create jobs” — if that means adding to the total number of paying jobs in the domestic economy.

Free trade neither creates nor eliminates jobs overall. (Likewise for protectionism.) What free trade does do is create different and better jobs by destroying older and worse jobs.

Recognizing that moving from protectionism to free trade (or vice versa) has no long-run impact on the total number of jobs in the economy strikes the non-economist as odd. This recognition, however, is nearly universally shared by economists. The reason is straightforward: Economists understand that most of what is popularly believed to be unique to international trade is, in fact, not unique to international trade.

A change in the volume of trade that crosses political borders is merely one among countless different changes that occur constantly in modern economies. And this change — like the great majority of other changes — is driven by voluntary consumer choices.

No one frets, for example, that if consumers start demanding more chicken and less beef that there will be any long-run change in the number of jobs in the economy. This change will “destroy” some jobs in the beef industry and “create” some in the poultry industry.

Experience has taught people that such economic change, although it disrupts some careers, is not a source of long-run changes in the overall level of employment.

And this lesson seems to hold even when — as might be true in our example — the number of new jobs created in the poultry industry is smaller than the number of jobs destroyed in the beef industry. Workers and other resources are generally able to perform different tasks. The accountant once employed by a now-bankrupt cattle rancher likely can find work — if not for a poultry producer, for some other kind of firm.

Of course, workers and other resources never switch from shrinking industries into expanding industries instantaneously. Economic adjustments take time and are often wrenching for particular workers and resource owners.

But this reality holds for all varieties of economic change. Economic change that happens to occur across political borders creates no special difficulties for displaced workers to find new jobs.

Workers’ abilities to adjust to economic change are affected also by how quickly prices in the domestic economy adjust. In particular, if wages are “sticky downward” — that is, if wage rates don’t quickly fall for jobs that today are in lower demand — then unemployment will last longer than it would if wage rates were more flexible. Excessively high wages price some workers out of jobs.

Inflexible wage rates are indeed a problem. But once again, this problem — to the extent that it exists — affects workers displaced by all instances of economic change and not just those workers displaced by economic change that happens to occur across political borders.

Recognizing that foreigners sell things to us only because they ultimately want to buy things from us should calm fears that increased trade uniquely contributes to increased unemployment.