The effects on the US labour market due to changes in the global export exposure


Term Paper, 2018
14 Pages, Grade: 1,0

Excerpt

Table of Contents

Introduction

Industry level – Empirical Strategy

Instrument for change in industry level import penetration from China

Instruments for change of global industrial export exposure

Industry level - Investigating the effect of export growth and import exposure on employment

Specifications

Commuting zone level – Empirical Strategy

Instruments for change in industry level import penetration from China and change of global industrial export exposure

Commuting zone level - Investigating the effect of export growth and import exposure on employment

Critic

Validity of the used instrumental variables

Contribution

Conclusion

References

Abstract

The following paper presents the main results of the article “US Exports and Employment” by Robert C. Feenstra, Hong Ma and Yuan Xu from September 2017. Moreover, this paper will focus on the underlying econometric methodology and will discuss possible weaknesses. Further, the following will examine the scientific potential of the underlying article and its contribution to science.

Feenstra et al. used instrument variables regressions to examine the unbiased effects of the change in the US industry level import penetration from China and the change of US global industrial export exposure on US employment. Besides some further specifications, they made two major regressions. For the first major regression model, they used data from 392 SIC manufacturing sectors to calculate the total effect on the industry level. The second major regression model workes with data from 722 commuting zones (local labor markets) to make precise statements about US employment responses. Both regressions use similar instruments, which had been constructed to address problems with endogeneity. As an instrument for the change in the industry level import penetration from China, Feenstra et al. used the change in import exposure from China within eight high-income countries instead of the change in import exposure from China in the US. On the other hand, they constructed two different instruments for the change of global industrial export exposure. The first instrument follows the same idea as its counterpart on the import side and uses the export expansion of the same eight high-income economies to the world. Further, the second instrument for the change of global industrial export exposure uses four determinants, for instance; the distance between the US and the importing country or import tariffs imposed by the importing country on US goods.

Eventually, both major regression models lead to similar outcomes, that in two decades, 1991 to 2011, the two effects, job losses due to an increasing import-competition from China and job-creation due to global export exposure, roughly offset each other, a few jobs got lost, respectively.

Introduction

Increasing imports from China have been a subject of massive critic from the White House and in particular from president Donald Trump. One often repeated argument in favor of hampering imports from China has been the job losses in the manufacturing sector due to import competition. Although, various papers focus on job reducing effects of surging imports from China and the theory that export exposure creates jobs is well accepted, the effects on the US labor market due to changes in global export exposure had not been examined yet. "US Exports and Employment" filled this gap by examining the employment responses to global industrial export expansion from the United States between 1991 and 2011. Further Feenstra et al. compared these responses with the employment responses due to changes of the import penetration from China in the same period. Therefore, Feenstra et al. worked with various instrument variables regressions and data sets on an industry level and commuting zone level.

The rest of the paper is structured as follows: Firstly, a detailed overview of the underlying empirical strategy of examining the effect of export growth and import exposure on employment at the industry level. Subsequently, a presentation of the main findings and a brief look at some specifications. Afterward, an overview of the empirical strategy of examining the effect of export growth and import exposure on employment at the commuting zone level, repeatedly followed by introducing the main findings. Furthermore, there will be a critic on the empirical strategy. Also, I will discuss the contribution of this article and lastly a conclusion, where I will state out my opinion about the article.

Industry level – Empirical Strategy

Feenstra, Ma, and Xu worked with instrument variables regressions to examine the total effects of changes in global export and import penetration. Firstly, they constructed a regression with data on the industry level. The main idea is to find out how much of the job creation or job losses have been directly related to changes of export, import from China respectively. With the construction of a regression with the dependent variable employment in manufacturing sectors and the exogenous variables change of global industrial export exposure and change in the industry level import penetration from China, one receives estimators about the magnitude of the impact from the two exogenous variables. However, if one uses the US data for the change of global industrial export exposure and change in the industry level import penetration from China, one will experience certain problems with endogeneity.

When it comes to examining an unbiased estimator for change in industry level import penetration from China, unobserved domestic shocks in demand lead to a correlation between the exogenous variable import and the error term. Unobserved domestic demand shocks simultaneously affect import and employment. For example, if US citizens ask for more Computers, this will drive up the employment in sectors, which are involved in the Computer production. However, it will also raise the import of computers. It becomes necessary to construct an instrument, which is not affected by unobserved domestic demand shocks and only affected by foreign (Chinese) demand shocks. On the other hand, the exogenous variable change of global industrial export exposure faces problems with US supply shocks, which come from improvements in productivity. Many productivity improvements lead to less costly production, but with fewer jobs in these sectors. Hence these productivity improvements drive up exports and shrink employment, and corollary lead to a correlation of the variable change of global industrial export exposure and the error term.

Instrument for change in industry level import penetration from China

The regressor Change in the industry level import penetration from China in sector s for the period t can be described as:

Abbildung in dieser Leseprobe nicht enthalten

∆MUCs,t stands for US imports from China (UC) in sector s for the period t (t is either 1991- 1999, or 1999-2007, in some cases 1999-2011). Industrial real shipment in sector s [Yst0] and industry real net imports [Mst0-Est0], both at initial year t0=1991 and deflated by the Personal Consumption Expenditures (PCE) are used to normalize. As mentioned before, it is not possible to use US data. Hence, we use the change in imports from China in sector s, at time period t from eight other high-income countries instead of ∆Ms,tUC to construct an instrument. These countries are Australia, Denmark, Finland, Germany, Japan, New Zealand, Spain, and Switzerland and these countries are not affected by unobserved US demand shocks. If one uses this instrument in the first stage regression to receive the exogenous variable change in the industry level import penetration from China, this regressor will only depend on Chinese supply shocks. US demand shocks do no longer have an impact and the problem with endogeneity is solved. In the following, this instrument is called ∆ImportsOTH.

Instruments for change of global industrial export exposure

Similar to its counterpart, the variable change of global industrial export exposure uses industrial real shipment as the denominator to normalize. Further changes in U.S. sector s exports in period t is the numerator. Thus, the regressor Change of global industrial export exposure in sector s for period t can be described as:

Abbildung in dieser Leseprobe nicht enthalten

Contrary to the instrument for change in the industry level import penetration from China, Feenstra et al. constructed two different instruments to address the concerns about endogeneity.

Though, the first instrument for change of global industrial export exposure follows the same idea as its counterpart. Instead of using the change in export expansion of the US, the instrument uses the change in export expansion of eight other high-income economies to the world. Repeatedly, both at period t in sector s. Hence, only the impact of foreign demand shocks influences the result of the regression and there is no longer a correlation of ∆EPs,t with the error term due to US supply shocks. However, this instrument reflects supply-side shocks in those eight countries themselves and corollary we receive a correlation between export and supply-side shocks. Therefore, it is reasonable to construct a second, more affine instrument.

The main idea of the second instrument for ∆EPs,t is to calculate predicted values for US exports with the help of four determinants within a constant-elasticity, monopolistic competition framework. The first determinant is the import tariffs imposed by the importing country j on US exporters. The second determinant is total imports by country j from all other exporters, which can be interpreted as a proxy for the multilateral demand of country j. Thirdly, country j's average import tariffs on all non-US imports of good s and lastly, the bilateral distance from the United States to importing country j.

Abbildung in dieser Leseprobe nicht enthalten

With the help of the latter regression it is possible to determine the change in US global export exposure in period t. Thus, every required information to construct a solid instrument for the change of global industrial export exposure is available. Eventually, one can use this instrument in our first stage regression to receive the exogenous part of the regressor change in global export exposure, which has no problems with domestic supply shocks, supply shocks in the eight high-income countries respectively. In the following, this instrument for ∆EPs,t is called ∆ExportsPRE and the first instrument is called ∆ExportsOTH.

Industry level - Investigating the effect of export growth and import exposure on employment

After receiving valid instruments for ∆IPs,t and ∆EPs,t, Feenstra et al. could perform their regression.

Abbildung in dieser Leseprobe nicht enthalten

∆ln(Lst) describes the relative change of employment in sector s in time period t. Xs0 is a set of start-of-period sectoral controls and ϵst describes the error term. Possible weaknesses of this regression model are discussed under the heading critic from page 11 onwards.

Feenstra et al. exercised five different instrument variables regressions. The regressions differ in the underlying data and the used variables. They experimented with using the period 1991 to 2007 and 1991 to 2011. Furthermore, they tried an OLS regression, which leads to biased estimates. Also, they tried using only the instrument ∆ExportsOTH for ∆EPs,t and using both instruments in the first stage regression for determining ∆EPs,t. It turned out, that the regression, using period 1991-2007 and using instruments ∆ExportsPRE and ∆ExportsOTH in the first stage regression leads to the preferred outcomes. This regression indicates that a one percentage point increase in import exposure leads to a 1.30 percentage point reduction in manufacturing employment and a one percentage point increase in export exposure generated a 0.69 percentage point increase in the manufacturing employment. With the formula, developed by Acemoglu et al. (2016) and the outcomes from the preferred regression, it is possible to identify the changes in industrial employment brought by the increase in imports and export. In other words, now it is possible to receive the total effect of job losses and job creation in all US manufacturing sectors over period t.

[...]

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Details

Title
The effects on the US labour market due to changes in the global export exposure
College
University of Mannheim
Grade
1,0
Author
Year
2018
Pages
14
Catalog Number
V496936
ISBN (eBook)
9783346017116
Language
English
Tags
United States, China, Employment, Trade, Tariffs, Donald Trump
Quote paper
Joshua Karcher (Author), 2018, The effects on the US labour market due to changes in the global export exposure, Munich, GRIN Verlag, https://www.grin.com/document/496936

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