How Are Workers Compensated Following Trade Liberalization?

Krzysztof Pelc (McGill University)
Sung Eun Kim (Korea University)

Abstract: How do workers cope with the adjustment costs from trade liberalization? Governments’ ability to deal with the distributional consequences of lifting trade barriers has become one of the key challenges facing developed democracies. Recent findings have shown how among workers harmed by liberalization, some turn to dedicated government training programs, while others fall back on disability payments and early retirement. These choices largely determine the odds of an individual returning to work, so what explains the variation? We demonstrate how in the US, the politically fraught nature of Trade Adjustment Assistance (TAA), combined with its administrative complexity, means that individuals are prone to elite framing effects. We use roll-call votes and legislators’ floor speeches on TAA to measure their attitudes towards trade adjustment, and proxy for the demand for trade adjustment by using economic shocks from Chinese import competition. When legislators hold negative views of the program, individuals in their districts become less likely to petition for, and receive, trade adjustment benefits. This, in turn, appears to render them more likely to fall back on alternative transfers, such as disability payments, which are less likely to get individuals back to work.

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