Joe works in a Pennsylvania steel mill. Many of Joe’s fellow Americans start buying more imported steel and, hence, less American-made steel. Because of this change in trade patterns, Joe – a good, hard-working, honest, play-by-the-rules, middle-aged family man who toiled in the steel mill all of his adult life – loses his job.
Joe is devastated.
How can we help Joe transition to another job or to otherwise cope with his job loss? This question is frequently asked. Crafting clever answers to it is a favorite task of policy wonks. And those of us who support free trade yet who spend no time endorsing (or even pondering) various options for the government to help workers adjust to changing trade patterns are thought to have hearts of stone or, at the very least, to be impractical dreamers who want the benefits of free trade but without the responsibility of sharing the costs of free trade.
Regular readers of Cafe Hayek know that I deal with this issue frequently. I’ll do so again in this post.
Responses to the question “How can we help workers adjust to changing trade patterns?” are several. Here are four.
– By “we” is meant the government. But why assume that any such assistance (such as unemployment insurance, job retraining, job-search help, and philanthropy) must be supplied by the state? Do not many individuals have the wealth, wisdom, and wherewithal to create, fund, and administer private responses?
– Changes in trade patterns that destroy particular businesses and jobs are not confined to changes in international trade or to technological innovations. Any time consumers change their patterns of economic activity – change their diets, change their work-leisure preferences, change their fashion preferences (How many hat-makers are there today compared to 100 years ago?), change their consumption-saving preferences, become more healthy by exercising more – some particular business and jobs are destroyed while other particular businesses and jobs are created. Should we help with worker-transition in all such cases? Why should a worker who loses a job to an import or to a technological innovation be “privileged” with government assistance relative to a worker who loses a job to a change in consumers’ diets or fashion sensibilities?
– Discussions of helping workers transition too seldom, on my reading, feature proposals to make business creation and expansion easier. Getting rid of, or at least reducing, occupational licensing will certainly help laid-off workers transition to new jobs. Ditto for reducing taxes, regulations, and zoning restrictions – many of which discourage entrepreneurs from starting new firms and from expanding existing ones. While much ‘worker transitioning’ involves workers moving to where jobs are, much of it also involves – and could involve even more – businesses and jobs moving to where available workers are. (Here’s one of my favorite real-world examples.)
– Too many discussions of worker-transition issues proceed not only as if workers, once laid off, are far more passive than most workers are likely to be in reality, but also as if workers are unnaturally passive when making employment decisions in the first place. That is, not only do most workers, once laid off, actively seek new employment opportunities (especially if they have no charity or unemployment insurance to rely upon), but most workers when considering jobs prospectively take into account some estimated risks of job loss versus pay.
Put yet a different way, too many discussions of worker-transition issues treat worker lay-offs as if these events come as complete surprises to workers – workers who are thought to have not, and who had no rational reason to have, anticipated some probability of being laid off.
But this treatment of worker-transition issues is naive. While workers (being human) are neither omniscient nor immune to error, they aren’t as passive, uninformed, myopic, and naive as the typical treatment of worker-transition issues assumes them to be. How many are the workers who truly believe that, once they land good jobs, their chances of being laid off are so close to zero that these chances can be safely ignored? Surely not many. (If you answer “many,” then you have a far too pessimistic opinion of your fellow human beings.) Workers can save in anticipation of possible lay-offs. (If you answer that workers aren’t paid enough to save, I respond that for whatever jobs this claim might be accurate in reality are jobs that are not worth protecting from foreign competition to begin with.)
But in addition to the possibility of saving in anticipation of possible lay-offs (that is, for a stretch of those “rainy days” that we’ve heard 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 or technological advances. And even if not all workers are aware that, say, job X has become more likely to be destroyed by trade or innovation than is otherwise-equivalent job Y, if only some workers are aware of this fact – or suspect it with sufficient seriousness – the supply of labor for Y will rise relative to the supply of labor for job X. A result will be that the wage rate for job X will rise relative to that for job Y. This higher wage rate for job X compensates for the X-workers’ greater likelihood, compared to that of Y-workers, of losing their jobs to imports or to innovation.
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 high risk of being destroyed during the times that these jobs are held by specific workers. To the extent that this ‘compensating differential’ operates in labor markets, to then offer special assistance to workers who are laid off because of imports or innovation results in these workers being overcompensated over time. Such special assistance also, therefore, attracts into these ‘at risk’ jobs more workers than would otherwise be attracted to those jobs. As a consequence, the wage rates for these jobs falls, wiping out the compensating differentials in the wage rates and imposing – “externalizing” – on taxpayers (if this special assistance is supplied by government), and off of employers, part of the cost of operating in industries in which jobs are at high risks of being destroyed by imports or innovation.
To sum up this last point: 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). Neither of these assumptions is realistic.
This piece was originally published at Cafe Hayek.