91: Can Trade Adjustment Assistance Work?

Hello, you are listening to an episode of Trade Talks, a podcast about the economics of trade policy. I'm Simea Keynes, the US Economics and Trade Editor for the Economist. And I'm Chad Bound, a senior fellow at the Peterson Institute for International Economics. This episode is about Trade Adjustment Assistance. You know when people say that we should have offered help to people left behind by trade, turns out there's already a program that's supposed to do that. It's called Trade Adjustment Assistance. If you haven't heard of it, you are forgiven. It's not very big, but it is there. The idea is that if import competition throws you out of your job, you get this trade adjustment assistance, or TAA, because it's a lot of syllables to say. So TAA, if you're eligible, you can get money, basically unemployment insurance. And then if you want, you can sign up for retraining, which the government will pay for. And then all that can last for us about three years. It's a pretty generous program. But the question for policy makers is, does it work? Is it worth the money? Should it be expanded? I spoke to Ben Hyman at the Federal Reserve Bank of New York about his research trying to look at the program's effects. For disclosure, I wasn't in the room for this one. And so, although you will hear my interjections and explanations, Ben did not. And also, given Ben is an employee of the Fed, I'm just going to whack in the disclaimer, any Fed employee always insert the beginning of whenever they say anything, which is that these are his personal views. They do not represent the views of the New York Fed or the Federal Reserve System. Thanks for getting that out of the way. So to Ben. Ben, hello. Hey, okay. So let's talk about your research. What questions are you going to answer? What I'm interested in in my research is looking at what happens to workers that are displaced from their jobs due to forces related to trade, such as import competition and offshoring, and what kind of support or lack of support government interventions have had for those workers? 15 to 20 years ago, I think the assumption was that workers hit by import competition would adjust. If trade and competition meant that one sector of the economy shrunk, then the idea was that others would expand. But now there is quite a bit of research to suggest that in some important cases, that adjustment did not happen. In the case of the China shock, for example, it seems that workers who lost their jobs because of trade didn't recover properly. Their employment rates didn't recover, and their earnings didn't recover. Now, obviously erecting tariffs to keep out trade comes with its own problems, so it's really important to know whether there are policies out there that could help. Now, obviously, TAA could help. That money in retraining could help folks find good, well-paid jobs, but there really hasn't been very much formal analysis of TAA's impact. There was one careful study, and that one compared workers that took up the retraining in TAA and compared them to a control group, a group of people who weren't offered any help at all, Ben told me about it. There was one serious analysis that had examined what happened to these workers when they were offered an incentive to retrain, and that paper found basically no effects. So, what you saw is that workers that took up the training compared to a control group didn't seem to be benefiting much from this program. However, as the authors of that paper noted, there were problems with sample design in that paper where they took workers just before the onset of the Great Recession essentially, and so a set of workers were training while the economy was going deeper and deeper into a dive while the control group sort of had a means to sort of begin adjusting early. And so, it's pretty hard. That was a very special time to sort of extrapolate the results from that paper out to what, in general, adjustment programs can do for these workers. The problem there was that it's probably a bit unfair to evaluate the program just as there is about to be an incredibly awful recession. The lesson of that study might be, if you know there's going to be a recession in a year, get those workers into jobs now, whatever they are, so they have a better chance of hanging on to them when the recession comes. But in normal times, it might be better to do the retraining to give you a chance of getting an even better job. Now, obviously, even doing that in more normal times, even working at the impact of the program then, that is hard. As an economist looking into the question of, was this TAA successful? The question is, what would have happened without the program? And you worry that the kinds of people who go for the retraining, they aren't average. Maybe it's something about them, something about the kinds of people who go for the retraining that means that they do well afterwards, and not actually anything to do with the retraining at all. Maybe they're more motivated or something, and maybe actually they would have done just fine without it. So Ben's paper tries really hard to isolate the impact of the TAA, and look through all of these possible confounding factors. Tell us about your paper then. What do you do to help us overcome this confounding problem? What I did was, I take advantage of an institutional feature of the program, in which two workers that are laid off from the same industry, so consider automobile parts, they apply for TAA by submitting a petition, and these petitions are assigned to investigators that are sitting in Washington, DC, whose job it is to discern whether, indeed, you lost your job due to trade, or whether instead it was some other factors such as automation and technology. And so these are folks that work at the Department of Labor that are in charge of looking at these cases. That's right. So they actually have legal subpoena power to go into the books of the employers that laid off these workers. They look for three things. The first thing they look for is, did this employer lose sales of final goods products as a result of import competition? Did they offshore part of their operations broad? And since 2002, there's been a third category, which is if you're an upstream supplier or downstream client of one of these employers and you're laid off from one of those firms, you also potentially qualify in the eyes of the Department of Labor. So these investigators have most of their job is sort of trying to figure out whether, indeed, these workers lost their jobs due to trade. So the point is that not everyone who applies for TAA gets it. And Ben's paper uses that to compare similar people who did and did not get approved. If one of the workers is assigned to a very strict investigator just randomly by chance of the draw, they have a much lower likelihood of receiving the benefit package. But they're still going to have a path of earnings and employment. And we're going to see in this rich data that I'm going to use where they're employed so that we can measure, you know, what happened to them. And so instead of saying, thinking of a typical like a clinical trial where you look at some folks that took a pill and others that took a placebo, here the experiment is that some of these workers are just assigned randomly to lenient investigator. And we're going to be able to estimate the effect of the program by just looking at the workers there that are assigned to those investigators. So you're not just comparing people who did and didn't get approved. You're trying to find people who got a pretty lenient investigator and did get approved with folks who got a really strict investigator and did not get approved. I asked Ben how he calculated who was strict. Right. So this is one of the sort of, you know, interesting things about the data that the Department of Labor was able to provide. It contains every single case, the case history of every given investigator. And so what you can do with that is you can say every given person that works there eventually sort of converges on their natural share of cases that they approve over their tenure at the Department of Labor. We can take this share so whether you've approved 75% of cases or 25% of cases, and that's the thing that we're going to exploit to try to estimate the impact of the program. And is there a lot of variation across these assessors? In plain English, Chad is asking whether some people are really tough and others are really soft or whether everyone is someone in the middle. If there are really big differences, then the whole exercise is much easier. There's a surprising amount of variation. So we see on average, 60% of cases are approved, but what we have, you have basically a range of it. Some investigators approving, you know, maybe 35-40% of cases while others are approving 75 to 80%. Ben also has some pretty cool data on people who lost their jobs, which means that he's able to track their earnings 10 years before and 10 years after they were laid off. So you've got some of these workers that ultimately end up getting treated with trade adjustment assistance. They get the benefits. And the control group is similar workers who aren't being treated who don't get the benefits. And that's determined by whether you get assigned a really strict or a mean assessor or one of the really nice ones. Okay, so that's the setup. What are your results? What do you find? I find that there is actually a positive real return to this program over the long run. And that was something that we didn't really know before or we didn't have much information on. So while it's true that workers forego earnings, while they're training, while they're out of the labor market relative to their peers that are just working, over time, if you look 10 years out, these workers have accumulated those that have retrained around $50,000 relative to those workers that do not retrain. So we're talking about on average about $5,000 a year. $5,000 a year. year. That sounds pretty good. And that's a pretty big number relative to what Ben finds they were earning before, which is around 27,000 dollars. So 5,000 on top of 27,000. But a policymaker will be interested in value for money. How much is that extra 5,000 dollars relative to the amount that the government spent giving all this help? It is a big number. It's definitely a big number relative to what we initially thought, but I just wanted to remind you that this is actually a pretty sizable intervention for these workers. So we're talking about the average worker receiving about $7,500 a year that goes to their retraining, so enrollment in a community college program or retooling, think about refrigeration mechanics, for example. And then during that time they get on average about $15,000 a year of unemployment insurance, and that is all extendable up to a maximum of roughly three years. And so while you have this large return and there is also a large outlay from the government's point of view. Still, $5,000 for folks who were previously earning around 27,000 dollars is a pretty meaningful bump. Now, part of this is going to be coming from the fact that these workers are just getting jobs more quickly. They now have sort of a flag on their resume that says, "I've retrained, I've retooled," and you might think that a lot of these earnings returns are coming through that. But what I'm able to show in the paper is that you can actually decompose how much of this is coming from, say, if you got a job at the wage rate that you had before being laid off, and how much of it is that, in fact, you're at a higher wage now. And I find that two-thirds of this is coming from just becoming employed quicker. But this remaining third is actually a sizeable number in terms of the job training human capital literature. It seems to be the case that this is, in fact, retooling these workers. However, there's also sort of this caveat, which is that if you look over a long period of time on an annual basis, average earnings look the same for the worker that retrained versus the one that didn't. So while they're reaping benefits in this sort of medium run, those skills don't seem to be sort of permanent, long-lasting skills, like the kinds that we know that four-year colleges and two-year credentialed community colleges tend to deliver. Now, to the extent that the program works, I wanted to know what we know about why it works. If you focus on these labor markets where not only is your city sort of badly hit, but all of your neighboring cities are badly hit, TAA is inducing you to both move far away and to get your new job and to switch industries at a fairly aggregated level. So we're talking about major occupational switches. But we don't see that pattern when we're just looking at a sort of layoff that's just happening in one location or one plant. And so that suggests that there's something about this mix of information coming from TAA, the tools that they're retraining you with, as well as the liquidity in your pocket that gives you time to actually search that's allowing you to really move. And the reason that that's very striking is that there's this overall trend that mobility is declining in the United States. But what we're seeing in the evidence here using this investigator design that we discussed is that workers are really moving in response to TAA when they're in one of these really heavily hit districts. But the way to interpret your results is that part of the benefits of the TAA program includes some funding for relocation and the workers that seem to be better are the ones that are taking advantage of that. It's actually the relocation benefits are actually really a drop in the bucket relative to the liquidity in your pocket. And so I'm thinking of this more as the mobility is actually coming from something that the program is giving you that's telling you about either giving you the space to search in other markets or telling you about what opportunities exist in these other markets. And so I think it's less than 1% of the total expenditures are spent on actual moving costs paying for your U-Haul and that kind of thing. But it's more this sort of I either have a mortgage or rent or some health expenses that I really need to cover right now. Why would I go and forego earnings even if it's a sort of a job that paid way less than what I had made in my sort of good manufacturing job before. Why would I go and retool when it's so costly? And so a lot of people might be stuck because they're constrained and then making you unconstrained really allows you to search further and get out of this sort of area of where we're sort of all the trade costs are agglomerated and concentrated. Any caveats? I think it's received a lot of attention because of the design we spoke about. We're still trying to understand how much of this is really coming from unemployment insurance and how much of it is coming from training. That is a really important question for further targeting this program. So there's the overall sort of wow maybe actually the current existing programs we have might be a way to defray some of the consequences from free or trade. But there's also the idea that researchers and public finance are very interested in which is how to make this more effective. And so I think more work it needs to be done to sort of make sure that we understand what mechanisms are actually driving this. And lastly it's sort of important to note that this is a medium sized program. While on a per person basis these guys get a lot of public expenditures it's really covering a small tiny fraction of what say unemployment insurance covers on an annual basis. So we're talking about like in 2010 roughly 230,000 workers across the country received TAA. Chad's last question for Ben was about how useful all this research might be in future. If the China shock is done why should anyone care about all of this going forward? The really interesting work going forward is sort of the focus on workers that will be displaced by automation in the future. And while to apply for TAA you need to at least at the margin be able to convince investigators that you might be adversely affected by trade there is a strong chance that in fact these same workers that we're looking at were impacted by technology and automation. And in fact I'm doing an extension of this work where we can look across different industries that are more likely where the workers are more likely to have been impacted by things like technology and automation relative to trade and see if this same kind of intervention is effective for them. A future episode of trade and automation talk. I hope so. And thank you very much. Thank you. That is nearly all for trade talks. But before I go I just wanted to say a few things that I remembered from when I wrote a piece about TAA ages ago. I went to Evansville, Indiana and spoke to some people who were getting it whose aluminium smelter head closed down and who were going through retraining. So first of all I remember that there was one problem which is that a bunch of people who were laid off from that smelter never took up the retraining. They were convinced that that smelter would reopen. I should also say that it actually did because this smelter did reopen so they weren't necessarily wrong about that. The other issue I remember is how difficult it was to apply for the TAA. I don't think the program has a spending cap but applying for it is quite a bureaucratic process. I remember speaking to someone whose job it was to help folks apply for this thing. He knew how the paperwork worked and so on. But if you didn't have someone like him showing you the ropes I can imagine it would have been very difficult. And before we go I wanted to make one other point which is about just how narrow the TAA program actually is. It doesn't cover for example people who lose their job because of technology improving or just because a plant moves somewhere else in the country. Shouldn't they also get the same sort of help. It also doesn't cover people who lose their jobs today because of all of the trade war stuff that's going on. You know all this retaliation that's hurting US exports for example. So that is all for trade talks. Huge thanks to Ben Hyman at the Federal Reserve Bank of New York. Check out his research paper titled Can Displaced Labor Be Retrained? Evidence from a quasi random assignment to trade adjustment assistance. And you can find this linked from our episode website at www.tradetalkspotcast.com. Do follow us on Twitter. I'm @Sameakains. And I'm @chatBound. And we're on @Trade_UnderschoolTalks. That's not one but two underscores. @Trade_UnderscoreTalks. Because when it comes to samples of trade impacted workers to see if the mini department of labor investigators made a big difference in their lives, two is better than one. That I get to excited there with the minis. And how old are you?