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Trade Policy and Total Employment

Opponents of free trade often mistakenly argue that free trade decreases the level of domestic employment. Proponents of free trade – who are more knowledgeable about economics than are protectionists – seldom make the mirror-image mistake of arguing that protectionism decreases the level of domestic employment. But sometimes a free-trader will err by making this latter argument. And this argument is indeed faulty.

Nothing in economic theory indicates that the degree of trade freedom – or trade restriction – has any impact over the long-run on total employment. Indeed, quite the opposite. Trade policy has no impact over the long-run on the level of employment (save, perhaps, in the very long run if free trade, by contributing to growing prosperity, better enables people to afford to remain out of the labor force for extended periods).

The employment impact of trade policy is on which particular jobs are ‘created’ and ‘destroyed,’ not on the total number of jobs. The freer is trade, the greater are the number of workers employed in the most productive-as-possible jobs. Free trade ‘destroys’ inefficient jobs and ‘creates’ efficient ones. Protectionism ‘destroys’ and prevents the creation of efficient jobs and ‘creates’ and protects inefficient ones. In the end, the chief ill economic consequence of protectionism is reduced total output and, hence, lower average real incomes.

Any observed correlation between changes in the height of trade barriers and changes in the rate of unemployment or declines in the rate of labor-force participation is due either to faulty measurement (a common problem) or to some factor or factors other than trade policy – for example, downwardly sticky wages, government-erected barriers to workers moving to new locations, or unemployment-compensation policies that pay workers to remain unemployed indefinitely. If these realities reign, then, of course, a move toward protectionism might be followed by an accurately observed indefinite increase in unemployment. But so, too, would this same increase in unemployment come about with a move away from protectionism.