The Surprisingly Swift Decline of U.S. Manufacturing Employment

TLDR: The authors link the sharp drop in US manufacturing employment after 2000 to a change in US trade policy that eliminated potential tariff increases on Chinese imports, and show that industries more exposed to the change experience greater employment loss, increased imports from China, and higher entry by US importers and foreign-owned Chinese exporters.

Abstract: This paper links the sharp drop in US manufacturing employment after 2000 to a change in US trade policy that eliminated potential tariff increases on Chinese imports. Industries more exposed to the change experience greater employment loss, increased imports from China, and higher entry by US importers and foreign-owned Chinese exporters. At the plant level, shifts toward less labor-intensive production and exposure to the policy via input-output linkages also contribute to the decline in employment. Results are robust to other potential explanations of employment loss, and there is no similar reaction in the European Union, where policy did not change. (JEL D72, E24, F13, F16, L24, L60, P33)

Figures

Table 7: PNTR and U.S. Manufacturing Employment (CM)

Table 8: PNTR and Plant Outcomes

Table A.5: PNTR and U.S. Manufacturing Employment, 1990 versus 1981

Table 9: PNTR and Supply Chain Linkages

Table 2: PNTR and U.S. Manufacturing Employment (LBD)

Table 3: PNTR and China-U.S. Trade

Full text

NBER WORKING PAPER SERIES
THE SURPRISINGLY SWIFT DECLINE OF U.S. MANUFACTURING EMPLOYMENT
Justin R. Pierce
Peter K. Schott
Working Paper 18655
http://www.nber.org/papers/w18655
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
December 2012
Schott thanks the National Science Foundation (SES-0241474 and SES-0550190) for research support.
We thank Lorenzo Caliendo,Teresa Fort, Kyle Handley, Gordon Hanson, Marc Muendler, Mina Kim
and seminar participants at numerous institutions for helpful comments. We also thank Jonathan Ende
and Rebecca Hammer for helpful research assistance. Any opinions and conclusions expressed herein
are those of the authors and do not necessarily represent the views of the U.SS Census Bureau, the
Board of Governors or its research staff. All results have been reviewed to ensure that no confidential
information is disclosed.
NBER working papers are circulated for discussion and comment purposes. They have not been peer-
reviewed or been subject to the review by the NBER Board of Directors that accompanies official
NBER publications.
© 2012 by Justin R. Pierce and Peter K. Schott. All rights reserved. Short sections of text, not to exceed
two paragraphs, may be quoted without explicit permission provided that full credit, including © notice,
is given to the source.

The Surprisingly Swift Decline of U.S. Manufacturing Employment
Justin R. Pierce and Peter K. Schott
NBER Working Paper No. 18655
December 2012, Revised January 2014
JEL No. E0,F1,J0
ABSTRACT
This paper finds a link between the sharp drop in U.S. manufacturing employment beginning in 2001
and a change in U.S. trade policy that eliminated potential tariff increases on Chinese imports. Industries
where the threat of tariff hikes declines the most experience more severe employment losses along
with larger increases in the value of imports from China and the number of firms engaged in China-U.S.
trade. These results are robust to other potential explanations of the employment loss, and we show
that the U.S. employment trends differ from those in the EU, where there was no change in policy.
Justin R. Pierce
Federal Reserve Board
20th and C ST NW
Washington, DC 20551
justin.r.pierce@frb.gov
Peter K. Schott
Yale School of Management
135 Prospect Street
New Haven, CT 06520-8200
and NBER
peter.schott@yale.edu

1 Introduction
U.S. manufacturing employment uctuated around 18 million workers between 1965
and 2000 before plunging 18 percent from March 2001 to March 2007. In this paper,
we nd a link between this sharp decline and the U.S. granting of Permanent Normal
Trade Relations (PNTR) to China.
Conferral of PNTR was unique in that it did not change the actual import tar-
i rates the United States applied to Chinese goods over this period. U.S. imports
from China had been subject to the relatively low NTR tari rates reserved for WTO
members since the 1980s. But for China, these low rates required annual renewals
that were uncertain and politically contentious. Without renewal, U.S. import taris
on Chinese goods would have jumped to the higher non-NTR tari rates assigned to
non-market economies and originally established under the Smoot-Hawley Tari Act
of 1930. PNTR  and the subsequent December 2001 accession of China to the WTO
 eliminated the uncertainty associated with these annual renewals by permanently
setting U.S. duties on Chinese imports to NTR levels.
Ending the possibility of sudden spikes in Chinese import taris likely strength-
ened import competition and suppressed U.S. employment growth. For example, the
decline in uncertainty and expected taris associated with PNTR may have increased
U.S. rms' incentives to incur the sunk costs associated with opening a plant in China
or establishing a relationship with an existing Chinese supplier. Likewise, PNTR may
have provided Chinese producers with greater incentives to invest in entering or ex-
panding into the U.S. market, putting further price pressure on U.S. producers. PNTR
also may have reduced U.S. manufacturing employment by inducing U.S. producers to
invest in capital- or skill-intensive production technologies or less labor-intensive mixes
of products that are more consistent with U.S. comparative advantage. Intuition for
these responses comes in part from models of investment under uncertainty, where rms
are more likely to undertake irreversible investments as the ambiguity surrounding their
expected prot decreases.
1
The nature of the policy change provides a straightforward measure of its potential
eect. We refer to this measure as the NTR gap and dene it as the dierence
between NTR tari rates (which average 4 percent across industries in 1999), and the
non-NTR rates to which they would have risen if annual renewal had failed (which
average 36 percent in 1999). NTR gaps exhibit substantial variation across industries:
in 1999, their standard deviation is 15 percentage points.
Our dierence-in-dierences identication strategy exploits this variation in the
NTR gap to test whether employment loss in manufacturing industries with higher
NTR gaps (rst dierence) is larger after PNTR has been instituted, relative to employ-
ment changes in the pre-PNTR era (second dierence). Because PNTR was granted
near the 2001 business cycle peak, we compare employment growth after 2001 to em-
1
Dixit and Pindyck (1994) provide a general overview of investment under uncertainty. See Handley
and Limao (2012) for one of the rst applications to international trade.
2

ployment changes after the previous peak, in 1990. One attractive feature of this
approach is its ability to isolate the role of the change in policy. While industries
with high and low gaps are not identical, comparing outcomes within industries across
peaks isolates the dierential impact of China's change in status. At the same time,
comparison of employment changes across similar intervals of the business cycle helps
control for manufacturing's inherent cyclicality.
Our estimates reveal a negative and statistically signicant relationship between
the change in U.S. policy and subsequent employment growth in manufacturing. This
relationship is also economically signicant: for an industry with the average NTR gap,
the shift in U.S. policy reduces employment growth from 2001 to 2002 by an additional
-3 to -4 percentage points compared with the same interval after the 1990 peak. Six
years after the 2001 peak, the implied dierence grows to -12 to -16 percentage points.
Transaction-level U.S. import data provide circumstantial evidence that these changes
in employment are driven in part by oshoring. We nd that U.S. imports of the
goods most aected by the policy change increase substantially after 2001, and that
this growth is driven by imports from China. Furthermore, we show that this jump in
trade value is mediated by a relative expansion in the number of U.S. rms importing
from China, the number of Chinese rms exporting to the United States, and the num-
ber of U.S.-China importer-exporter pairs. This relative growth along the extensive
margin of U.S. and Chinese trading rms is consistent with greater policy-driven in-
centives to invest in new trade relationships, and shows that U.S. imports from China
surge in the same industries that experience the largest reductions in employment.
As part of its accession to the WTO, China agreed to institute a number of policy
changes which also might have inuenced U.S. manufacturing employment, including
a reduction in import taris, the phasing out of export licensing requirements and
production subsidies, and the elimination of barriers to foreign investment. Using data
from a variety of sources, including rm-level microdata from China's National Bureau
of Statistics, we show that while these policies also are related to employment outcomes
in the United States, their implied contribution is small relative to PNTR. We also nd
that our results are robust to other U.S. economic developments contemporaneous with
PNTR, such as the bursting of the 1990s information technology bubble, the expiration
of the global Multi-Fiber Arrangement governing Chinese textile and clothing export
quotas, and declining union membership in the United States. Finally, we compare
the U.S. experience to that of the European Union, which gave China the equivalent
of PNTR in 1980. In contrast to the United States, we nd no relationship between
post-2001 manufacturing employment and the U.S. NTR gap in the EU.
We pursue several extensions of our baseline ndings. First, we decompose industry
employment growth along gross margins of adjustment and show that both elevated job
destruction and suppressed job creation make sizable contributions to the overall im-
plied impact of the change in U.S. policy. Second, we show that industries most aected
by PNTR exhibit increases in skill intensity. Third, examining outcomes at the plant
level, we nd that the change in U.S. policy is associated with declining employment
within continuing establishments as well as a higher probability of establishment death.
3

Finally we investigate the extent to which PNTR's eects are transmitted via up- and
downstream industries and nd that exposure along both dimensions is associated with
greater probability of plant death.
The paper proceeds as follows: Section 2 outlines our contribution to existing re-
search; Sections 3 and 4 describe our data and empirical strategy; Sections 5 through
8 present our results; and Section 9 concludes. An online appendix provides additional
empirical results.
2 Related Literature
This paper makes several contributions to a large body of research spanning interna-
tional trade, labor and macroeconomics. First, we show that a substantial portion
of the loss of U.S. manufacturing employment since 2001 is related to a discrete and
easily identiable change in policy  the U.S. conferral of PNTR on China.
2
While
others, including most recently Autor, Dorn and Hanson (2012), have highlighted a
negative relationship between low-wage country imports and U.S. employment, our
research points to a specic policy change in the United States as the cause for the
acceleration of Chinese imports, and relates it to a wide range of outcomes across both
U.S. and Chinese producers.
3
In particular, we show that the largest relative declines
in employment in the years after 2001 are concentrated in industries that experienced
the largest declines in uncertainty and expected taris as a result of PNTR, and that
these industries also experience relatively large increases in Chinese import value, as
well as the number of U.S. importers and Chinese exporters.
4
Second, our examination of rms' reactions to the elimination of uncertainty over
tari rates rather than actual reductions in taris contributes to the literature analyzing
investment under uncertainty (e.g. Dixit and Pyndick 1994; Bloom, Bond and Van
Reenen (2007)), as well as its application to international trade. Our eort is closely
related to the work of Handley (2012) and Handley and Limao (2012, 2013), who show
2
Early research on import competition by Freeman and Katz (1991) and Revenga (1992) documents
a negative relationship between growth in U.S. manufacturing employment and either imports or
changes in import prices at the industry level. Subsequent research focuses on the impact of imports
from low-wage countries across industries (e.g., Sachs and Shatz 1994) and establishments (Bernard
et al. 2006). More recent papers investigate the eect of China on manufacturing employment in
a range of countries, including Belgium (Mion and Zhu 2013), the EU (Bloom et al. 2012), Mexico
(Utar and Torres Ruiz 2013) and the United States (Ebenstein et al. 2011, Autor et al. 2012, and
Autor et al. 2013).
3
In focusing on the impact of a particular policy, this paper is closest to Bloom et al. (2012), who
show that employment losses across EU apparel and textile manufacturers coincide with the removal
of import quotas on Chinese exports of these goods, and to Utar and Torres Ruiz (2013), who nd
a reduction in employment at Mexican maquiladoras associated with China's accession to the World
Trade Organization.
4
Models of importing also provide insight into the potential impact of PNTR. Groizard, Ranjan
and Rodriguez-Lopez (2012), for example, show that a decline in import taris raises the demand for
foreign inputs and thereby reduces domestic employment.
4

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "Nber working paper series the surprisingly swift decline of u.s. manufacturing employment" ?

This paper finds a link between the sharp drop in U. S. manufacturing employment beginning in 2001 and a change in U. S. trade policy that eliminated potential tariff increases on Chinese imports. These results are robust to other potential explanations of the employment loss, and the authors show that the U. S. employment trends differ from those in the EU, where there was no change in policy. 

Q2. What are the future works mentioned in the paper "Nber working paper series the surprisingly swift decline of u.s. manufacturing employment" ?

This paper documents a strong relationship between the sharp decline in U. S. manufacturing employment beginning in 2001 and the United States ' conferral of permanent normal trade relations on China, a policy that is notable for eliminating the possibility of future tari increases rather than reducing the tari s actually applied to Chinese goods. The authors hope to bring additional data to bear on these questions in future research. 

Q3. What is the significance of the coe cients for capital and skill intensity?

Coe cients for capital and skill intensity are mostly positive and negative, respectively, indicating that higher capital intensity is associated with higher employment growth, while higher skill intensity is associated with lower employment growth. 

Q4. What is the important factor in the agglomeration patterns of U.S.?

Ellison, Glaeser and Kerr (2010) show that proximity to input suppliers and nal customers is the most important factor in the agglomeration patterns of U.S. manufacturing industries. 

Q5. What is the reason for the differences in the NTR gap?

Another explanation for their results is that they are driven by labor-saving technical changes, such as automation, which are spuriously correlated with the NTR gap. 

Q6. What does the President have to do to grant tari to non-market economies?

Act of 1974 allows the President to grant NTR tari rates to nonmarket economies on a temporary basis subject to Congressional approval. 

Q7. What is the effect of PNTR on the growth rate of production hours?

The estimates in column 4 indicate that PNTR also had a substantial (-18.7 percentage points) negative e ect on the growth rate of production hours, con rming that the decline in employment can not be solely attributed to an increase in the number of hours worked per employee.