Working paper

The Effect of Import Competition across Occupations

Published on the 23rd of December 2024
Authors : Sergi Basco, Maxime Liégey, Marti Mestieri, Gabriel Smagghue

Working Paper Series no. 980. We empirically examine the effect of import competition on worker earnings across occupations. To guide our analysis, we develop a stylized model that emphasizes industries using occupations in different intensities. We show that an occupational exposure index summarizes the overall exposure of an occupation to industry-level trade shocks. Proxying these industry-level trade shocks with rising Chinese competition and using nationally representative matched employer-employee French panel data from 1993 through 2015, we obtain evidence consistent with the predictions of the model. We find that workers initially employed in occupations highly exposed to Chinese competition –as measured by our occupational exposure index– experience larger declines in earnings. The magnitude of our estimates implies that the effect of rising Chinese competition on workers’ earnings due to differences in workers’ occupations is of comparable magnitude to the effect of workers’ sector of employment. This finding suggests that accounting for the distributional effects of trade across occupations is quantitatively important.

Figure 1. Cumulative Impact of the China Shock on Occupational Earnings

Image Figure 1. Cumulative Impact of the China Shock on Occupational Earnings This figure shows the cumulative impact of occupational exposure to Chinese import competition on worker earnings from 1997 to 2015. Exposure combines industry trade shocks with occupational intensity, measured by changes in China's import penetration. Higher exposure leads to greater earnings losses, with heavily exposed occupations losing up to 20% of 1997 earnings annually. Graph Interpretation: At year =2010 on the graph, a 1% incre Thématique Economy Catégorie Working paper
Note: This figure shows the cumulative impact of occupational exposure to Chinese import competition on worker earnings from 1997 to 2015. Exposure combines industry trade shocks with occupational intensity, measured by changes in China's import penetration. Higher exposure leads to greater earnings losses, with heavily exposed occupations losing up to 20% of 1997 earnings annually. Graph Interpretation: At year =2010 on the graph, a 1% increase in exposure corresponds to a cumulative earnings reduction of 1.8% (computed from 1997 to 2010) relative to 1997 earnings.

How does global competition reshape labor markets, not just across industries, but within the occupations that define them? This study investigates the distributional effects of rising import competition from low-wage economies, particularly China, on workers in various occupations within the French labor market. By focusing on the period from 1997 to 2015, it sheds light on how exposure to trade shocks impacts earnings and job trajectories differently across occupations.

Using an innovative occupational exposure index, which measures the degree to which occupations are utilized in industries exposed to international trade shocks, the study reveals significant heterogeneity in how different professions are affected by trade shocks. Workers employed in occupations more intensively used in industries exposed to Chinese competition, such as production workers—both skilled and unskilled—experience significantly greater declines in earnings compared to those in less exposed roles, such as administrative or mid-level service occupations. For instance, while unskilled production workers may see annual earnings reductions of up to 20% of their initial (1997) earnings, administrative roles often face declines of less than 5%, and engineers show even smaller impacts, reflecting the varied exposure levels across these groups. 

The study categorizes occupations into broad groups based on hierarchical roles and skill requirements, determined by the level of education, job responsibilities, and hierarchical position within firms. These include unskilled and skilled production workers, administrative staff, technical staff, engineers, and executives. Each group’s exposure to trade shocks is evaluated using an occupational exposure index that combines industry-specific trade shock data with the intensity of occupational usage in those industries. This approach allows for a nuanced understanding of how specific occupational traits influence vulnerability to global competition.

To guide its empirical analysis, the paper develops a theoretical model treating occupations as factors of production, with different roles and intensities across industries. By leveraging matched employer-employee panel data from French social security records, it captures the dynamic nature of trade adjustment, documenting both immediate and long-term effects. The results show that while workers in highly exposed occupations face pronounced income declines, they tend to remain in their original occupations rather than transitioning to entirely new roles, underscoring the rigidity of occupational mobility in the face of global competition.

A key methodological innovation of the paper is its use of an instrumental variable approach to isolate the effects of Chinese import penetration from other concurrent economic changes, such as automation or shifts in domestic demand. This robust identification strategy ensures that the observed impacts are causally linked to the "China shock" rather than unrelated factors.

The findings carry important policy implications. They suggest that interventions aimed at mitigating the adverse effects of globalization should consider the specific vulnerabilities of occupations within industries, rather than focusing solely on sector-wide adjustments. Supporting skill development and mobility within highly exposed occupations may help workers adapt to the rapidly evolving global economy. Additionally, policies addressing the broader labor market impacts of trade, such as wage insurance or targeted retraining programs, could help alleviate the distributional challenges posed by rising global competition.

This study contributes to the growing literature on the heterogeneous impacts of trade, offering new insights into how occupations shape the adjustment process and highlighting the nuanced ways globalization influences labor markets.

 

Keywords: Occupations, Inequality, Import Competition 
JEL classification: F11, F14, F16

Updated on the 23rd of December 2024