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Most economists agree that, on balance, free trade benefits the U.S. economy. They also agree that it creates winners and losers. Those who gain access to new markets abroad thrive. Those undersold by overseas rivals suffer.
But that’s what happens at the start of a trade deal, when businesses and workers are still adjusting, according to Ricardo Reyes-Heroles, a senior economist with the Federal Reserve Board of Governors. He wanted to know what happens next. When new workers join the labor force, surely they would look for work in thriving industries and avoid declining ones?
Yes, they would, but inequality among new workers means some adjust faster to trade shocks than others, according to an empirical analysis and an economic model he and two co-authors developed based on trade between the U.S. and China.
Because most U.S. industries that thrive on trade with China require college degrees— education and financial services, for example—young workers are more likely to attend college after seeing how trade affected their parents’ generation. But young workers who can’t afford tuition will likely end up in low-wage jobs for another generation.
The magazine of the opportunity & Inclusive Growth institute
“The wealth of your parents actually matters a lot,” said Reyes-Heroles, who presented a paper describing the project at the Institute’s fall mentoring workshop.
His model predicts that workers who missed out on college will save so their children can go, allowing that generation to finally gain from trade.
Growing up in Mexico City as the North American Free Trade Agreement (NAFTA) went into effect, Reyes-Heroles said he was exposed to discussions about trade between his economist father and his father’s colleagues. One of the inspirations for his latest paper is how NAFTA was initially greeted in Mexico. People complained that only border regions benefited from new factories, while regions farther south lost farm jobs. By the time his generation entered the labor force, though, few thought NAFTA was a bad thing, he said.
It’s important to consider these multigenerational transitions, Reyes-Heroles said. Looking at just one generation makes it seem like the benefits of trade will never reach everyone. It also obscures potential policies to limit hardship for those suffering losses. One policy to consider, he said, is subsidizing college tuition for those harmed by trade, which could shorten the transition period by a generation.
This article is featured in the Spring 2022 issue of For All, the magazine of the Opportunity & Inclusive Growth Institute
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Tu-Uyen Tran is the senior writer in the Minneapolis Fed’s Public Affairs department. He specializes in deeply reported, data-driven articles. Before joining the Bank in 2018, Tu-Uyen was an editor and reporter in Fargo, Grand Forks, and Seattle.
