The Influences of Trade on Industry-level Wages and Employment

The calibration exercise presented in chapter 3 illustrates that the United States has lost comparative advantage in the production of a number of goods during the period from 1968 through 2008. In other words, some of the goods that were produced in the United States in years past are now being produced elsewhere in the world. This may appear to be more detrimental for US workers than it really is. In fact, the loss of comparative advantage is representative of labor market churning, in which the production of goods for which the United States has retained comparative advantage has increased in magnitude and/or production in the United States has shifted toward new goods and services. This entails a reallocation of labor, and other factor inputs, from those firms and industries that have declined domestically toward those firms and industries for which production has expanded. Still, while it is predicted that the typical worker gains, through greater purchasing power, as a result of the changes in factor endowments, it is possible that some workers have experienced negative consequences. For example, as part of the labor reallocation process, domestic workers may experience job loss, job displacement, and/or a stagnation or decline in their real wage.