low-income countries. This has hap-
pened over and over again in the past
half century.
Any time an employer closes up shop
in a community—large or small—it is
traumatic to the community and to the
individuals involved. Plant closings get
high-profile coverage in the media. It
is reported that 55,000 American jobs
are moving overseas each quarter. One
could easily get the impression from the
media that all of our jobs are moving
offshore. Not to understate the trau-
matic impact on the individuals and
communities concerned, when put in
perspective, the problem is not nearly
as large as it appears in the media.
The United States has a well-functioning
labor market and a very mobile work
force. No one expects any longer to stay
in a single job throughout a career. Every
three months about 7 million Americans
change jobs, and over 400,000 new jobs
are created in the United States. The U.S.
unemployment rate is very low by inter-
national standards, and there are large
numbers of undocumented workers in
jobs that most Americans don’t want.
Economic theory tells us that when
trade liberalization occurs, the gains of
the gainers exceed the losses of the los-
ers, and the country as a whole ends up
better off. It does not say there are no
losers, but it does say that because the
gains of the gainers exceed the losses
of the losers, it should be possible to
compensate the losers for their losses
and still end up with a net gain to soci-
ety as a whole.
If a country is to reap the potential ben-
efits from globalization—increases in
both consumer purchasing power and
potential GDP—adjustment must be
allowed to occur. The market must be
allowed to reallocate resources (land,
labor, and capital) from the sectors that
have lost competitiveness to sectors that
can compete. However, such adjustment
is neither costless nor painless. It hurts
people who have specialized skills that
are salable only in the sectors that are
in decline. It also hurts people who have
made investments in specialized machin-
ery and factories that are not useful in
producing other things than those they
were designed to produce.
A well-functioning labor market, such
as that of the United States, is essential
to facilitate adjustment as smoothly and
painlessly as possible. However, even
with a well-functioning labor market,
change can be costly in both monetary
and emotional terms. Changing one’s
line of work often requires retraining,
which may involve significant expendi-
ture. There is also the matter of pro-
viding income for the family during
the period of training. Changing jobs
may require a physical relocation, which
involves both the financial cost and the
emotional cost of leaving family and
friends behind and starting over in a new
community. Older people may simply
not feel they have enough working years
left to incur the costs associated with
starting over in another line of work
or place.
Firms that lose their competitiveness are
likely to have undepreciated specialized
capital equipment that still has produc-
tive life left in it and must be written off
as a loss. Investors in the business suffer
capital losses. In the farm sector, a loss
in competitiveness can also precipitate
a drop in land values.
It is natural that people who are com-
fortable in their present situation—
workers and investors alike—try to avoid
adjustment. People in this situation of-
ten see themselves as being singled out
for unfair treatment, being asked to
accept losses in the value of their skills
or investments. In our democratic sys-
tem, it is also normal for politicians to
do everything they can to “protect” jobs
in communities that they represent, es-
pecially just before elections. As former
Congressman Tip O’Neill said many years
ago, “All politics is local.” Further, no
politician wants to see the number of
voters in his or her district decline.
The cost of protectionism
When barriers to imports from lower-cost
suppliers are erected, all of the country’s
consumers of that product are forced
to pay more. In effect, they are taxed
on their consumption of that good or
service. The country’s residents are
asked to accept a lower per capita gross
national product as a result of wasting
some of the country’s resources produc-
ing things that another country can
produce at lower resource cost. Each job
“saved” may end up costing consumers
hundreds of thousands of dollars per
year. The cost of providing the protec-
tion is diffused across all consumers of
the products, while the benefits accrue
to a relatively small group.
Great creativity is shown in the protec-
tionist arguments used by leaders and
advocates of industries that have lost
their competitiveness. As a last resort,
many petitioners for protection from
lower-cost imports make the case that
we need to protect a given industry be-
cause in a time of war it would be essen-
tial to have production capacity in that
sector inside our country.
Labor groups often argue that it is un-
fair for them to have to compete with
“cheap labor” in less developed countries.
But that is exactly the point. In indus-
tries that are inherently labor-intensive,
there is no way we can be competitive,
and bidding up wages (reducing pov-
erty) in presently low-income countries
is what economic development is all
Michael H. Moskow, President; Charles L. Evans,
Senior Vice President and Director of Research; Douglas
Evanoff, Vice President, financial studies; Jonas Fisher,
Economic Advisor and Team Leader, macroeconomic
policy research; Richard Porter, Vice President, payment
studies; Daniel Sullivan, Vice President, microeconomic
policy research; William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Kathryn Moran, and Han Y. Choi, Editors; Rita
Molloy and Julia Baker, Production Editors.
Chicago Fed Letter is published monthly by the
Research Department of the Federal Reserve
Bank of Chicago. The views expressed are the
authors’ and are not necessarily those of the
Federal Reserve Bank of Chicago or the Federal
Reserve System.
© 2007 Federal Reserve Bank of Chicago
Chicago Fed Letter articles may be reproduced in
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ISSN 0895-0164