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Trade and Overall Employment in a Country

Sunday, October 9, 2016 14:10
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(Don Boudreaux)

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Several people recently have ask why economists argue that protectionist policies do not lead to greater unemployment over the long-run in countries whose governments impose such policies.  I hope soon to do a longer post on this matter, but for now I content myself to state the argument in summary form and to support that argument with one simple thought experiment.

The argument, in summary, is that the degree of employment within a country is ultimately determined by the flexibility (or not) of its labor markets, by the expectations of workers there, by the ability and willingness of these workers to endure unemployment as they search for better job offers, and by the macroeconomic conditions that prevail in that country.  The freedom or restrictiveness of international trade has no direct bearing on any of these matters.  While a movement to greater protectionism – no more than a movement to freer trade, or any other change in the patterns of consumer demands (regardless of the source of these changes) – will destroy some jobs, it will create others.  Such a move might or might not result in a measurable, short-run increase in the unemployment rate (just as a movement to freer trade might or might not increase the unemployment rate over the short-run).  But there’s no reason to believe that tighter trade restrictions are any more likely to render workers permanently unemployed than there is to believe that a change in consumers’ dietary habits (and, hence, in the kinds of foods consumers buy) will render workers permanently unemployed.

What protectionism does do on the employment front is to protect lower-paying jobs and, in the process, prevents the creation of higher paying jobs.  But protectionism does not, as such, promote greater long-run unemployment.

To see why this conclusion is valid, consider the well-known decline in birth rates in Europe and in Japan.  This reduction in birth rates means that the number of Europeans and Japanese that Americans can today trade with is lower than it would have been had there been no decline in European and Japanese birth rates.  Yet no one, correctly so, ever argues that this decline in the birth rates of some of America’s biggest trading partners will raise long-term unemployment in America.  Because this decline in birth rates perhaps causes the division of labor to be less deep than it would otherwise be, and because it means that the world is blessed with less of the ultimate resource (human beings in relatively free economies), we Americans are arguably poorer today than we would be had these birth rates not declined.  But this decline in European and Japanese birth rates, although it diminishes the amount of foreign trade we do, does not cause our long-term unemployment rate to be higher than it would otherwise be.

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