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With Trade Promotion Authority (TPA) passed, the congressional debate now turns to the impact of the Trans-Pacific Partnership (TPP) on American workers. As Nancy Pelosi asserts, “It is a debate about advancing America’s workers, about bigger paychecks for America’s workers.” Moreover, as Hillary Clinton argues, “Any trade deal has to produce jobs and raise wages and increase prosperity and protect our security.”
In a previous post, Lindsay Oldenski and I argued that the TPP does indeed have the potential to create better jobs with “bigger paychecks” for American workers. Greater market access to the 11 TPP partners will enhance US export opportunities with jobs that pay up to 18 percent higher than average wages. Inward investment into the United States from TPP countries will be concentrated in higher paying management, marketing, and research and development (R&D) jobs for Americans. Investors from TPP countries in the United States already pay workers more than $74,000 in wages and benefits on average. Outward expansion by US multinational corporations (MNCs) tends to boost complementary investment at home in activities such as R&D, finance, and headquarters management where American workers also enjoy above-average wages and benefits.
But economists are taught—as a matter of theory—that trade agreements cannot be expected to create a greater total number of jobs in the economy. And economic predictions about the impact of the TPP a year or so after it is finalized—say, by mid-2017—confirm that there will be no noticeable impact on the total number of jobs in the US economy.
So there is good reason to support a trade and investment agreement like the TPP because it will create better jobs in the US economy.
But why do economists argue that trade and investment liberalization cannot be expected to generate a greater number of jobs?
And how can the most careful estimates already confirm that the TPP will not result in an increase in the total number of jobs in the United States?
Trade and the Number of Jobs: Two Contrasting Perspectives
In a somewhat smart-aleck fashion, Paul Krugman summarizes the classic economists’ perspective on the relationship between trade liberalization and job creation: “During the NAFTA debates I shared a podium with an experienced, highly regarded US trade negotiator, a strong NAFTA supporter. At one point a member of the audience asked me what I thought the effect of NAFTA would be on the number of jobs in the United States; when I replied ‘none’, based on the standard arguments, the trade official exploded in anger: ‘It's remarks like that which explain why people hate economists!’” (Krugman 1996).
What are “the standard arguments” and why is the answer to the more-jobs question “none”?
Economists are taught to view the number of jobs in an economy as a macroeconomic phenomenon—the result of the overall demand for workers versus the overall supply of workers. When demand for workers is strong enough to employ all those who want to work without setting off an upsurge in inflation, the economy is at full employment, and any extra demand that might come from increased exports or reduced demand that might come from job-competing imports will simply rearrange the mix of jobs in the domestic economy. So when the economy is operating at full employment—an ideal state that is seldom perfectly achieved—trade liberalization changes the composition of jobs but not the overall number. This is the economists’ perspective.
However, concerned citizens, politicians, and the press are likely to start from a different perspective. They see that some firms are laying off workers in response to a trade agreement while others are hiring more workers and want to know what the balance between the layoffs and new hires is. A reputable survey research firm could be hired—and probably will be, say, one year after the passage of TPP—to ask a representative sample of US firms the extent to which they hired or laid off workers in response to the particular trade agreement. The empirical results from this national survey will include reports of job gains and job losses (layoffs), and the sum could plausibly be net-plus or net-negative. It is unlikely the sum will be exactly zero.
How can these two perspectives on the impact on the number of jobs be reconciled?
The key to reconciling these two perspectives is to introduce the role of the Federal Reserve: If the US economy is operating near full employment over this 1-year period, then the Federal Reserve will loosen or tighten monetary policy to offset the positive or negative pressure on the labor market. If the US economy is not operating near full employment, then a positive number of jobs from trade expansion would be allowed to persist, whereas a negative number of jobs from trade expansion would inspire looser monetary policy on the part of the Fed.
The US economy is too large for trade agreements such as the TPP to likely lead to big enough swings in employment or unemployment to make a huge difference on the overall unemployment rate (more than 90 percent of US workers are in sectors minimally affected by trade). But the objective of the Fed is to counteract swings that might occur, so as to keep the domestic economy as near to full employment as possible without spurring inflation.
Understanding that the Federal Reserve will take countervailing actions depending upon whether the business cycle has the economy near full employment or not is what leads economists to say that the correct answer to whether there will be job gains or job losses from increased trade is “none.” By contrast, knowing that companies will answer survey researchers with the number of workers they have hired or laid off in response to any given trade and investment agreement may be what leads politicians, the press, and the public not to believe the “none” prediction of the economists. But the two perspectives are compatible and not in contradiction.
The TPP and the Number of Jobs in the United States: Careful Prediction
Building upon the previous analysis, it is possible to make a prediction about the TPP and the number of jobs in the US domestic economy. To do so requires first making an assumption about when the TPP will be completed and ratified by the US Congress, then calculating what a national survey of employers one year after TPP’s entry into force might show, and finally estimating how close to full employment the US economy will be during this period.
With TPA passed, the 12 TPP countries now face difficult closing negotiations. Before a multilateral agreement is reached, US and Japanese negotiators will have to finalize their bilateral agreement by resolving outstanding sensitive agricultural and automotive issues. Once the US-Japan agreement is concluded, other governments—in particular Australia and New Zealand—will conduct their own negotiations to secure agricultural market access since the US-Japan deal-making will not have been conducted according to most-favored nation principles. Rules pertaining to state-owned enterprises, worker rights, and environmental protections among the 12 TPP members remain outstanding.
Once completed, congressional scrutiny of the deal will be intense, but the entire package will be voted up or down under TPA or “fast track” procedures. One might pick the first or second quarter of 2016 as the timing of final TPP ratification in the United States.
With this assumption, what will the US job market look like one year later, in the first half of 2017? Peter Petri, Michael Plummer, and Fan Zhai estimate that job shifts (hires and layoffs) attributable to the TPP will average 40,000 to 50,000 per year in 2017, or approximately 4,000 per month (see Petri, Plummer, Zhai 2012, Petri 2015a, and Petri 2015b). Within this job mix, they expect hires in export-related jobs to pay more than layoffs in import-competing jobs. Hires in service jobs related to internet activities, software, movies, and other activities that will benefit from greater intellectual property protection in the TPP partners, will pay an even higher premium. Based on these assumptions, they calculate that overall welfare gains to the US economy should equal $459,000 per job shift.
What will be happening to the overall US economy during the first half of 2017? David Stockton forecasts that the US economy will be growing at 2.3 percent, with an unemployment rate of 4.7 percent (approximately full employment) and a core inflation rate of 1.8 percent, still slightly below the 2.0 percent desired by the Fed (Stockton 2015). The Federal Reserve will be in the process of gradually raising the Fed funds rate from 1.5 percent toward 2.5 percent by the end of 2017.
The fluctuations in employment due to the TPP will frankly be too small to likely appear on the Fed’s radar—4,000 per month in comparison to total churning that averages 4 million per month—but to the extent TPP-plus-other-job turnovers might appear to affect the movement toward 2 percent annual inflation, the Fed will adjust the Fed funds rate accordingly. Thus, while the TPP will cause a shift toward better paying jobs in the United States, the Fed will see to it that the total number of jobs moves gradually toward what it considers full employment with inflation at no more than 2 percent.
Finally, the Complete Picture
The analysis reconciles the common sense perspective of citizens, politicians, and the press with the technical rigor of economists. Citizens, politicians, and the press observe society after a trade agreement is signed, see workers laid off and workers hired, and wonder whether the balance is likely to be positive or negative. Economists note that if the economy is near full employment, the Federal Reserve is poised to counteract any notable job gain or job loss that might affect the inflation rate.
Meanwhile the composition of the job base in the United States shifts toward more higher-paying jobs and fewer lower-paying jobs. Over the medium term—by 2025—some 650,000 workers, close to 0.5 percent of the US labor force, can be expected to work in higher-paying export-related jobs, with additional jobs in above-average paying inward-FDI related jobs, as a consequence of the TPP.
References
Krugman, Paul. 1996. Ricardo’s Difficult Idea. Unpublished paper.
Petri, Peter A., Michael G. Plummer, and Fan Zhai. 2012. The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment. Policy Analyses in International Economics 98. Washington: Peterson Institute for International Economics.
Petri, Peter A. 2015a. “What Economic Models Tell Us about the TPP,” Trade and Investment Policy Watch, February 18, 2015, Peterson Institute for International Economics.
Petri, Peter A. 2015b. “Understanding the Estimated Gains from Trade Pacts,” Trade and Investment Policy Watch, June 17, 2015, Peterson Institute for International Economics.
Stockton, David J. 2015. “The Global Economy: Out of Sync,” presentation at the Peterson Institute for International Economics, April 7, 2015, Washington, DC.
