trade and worker deskilling trade and deskilling...other leave wins followed and by 2.17am, nigel...

Trade and Worker Deskilling

Rui Costa1, Swati Dhingra1,2 and Stephen Machin1,2

1Centre for Economic Performance, London School of Economics

2Department of Economics, London School of Economics

April 2019

Motivation

• Globalisation has been pinpointed as one of the possible culprits of lowproductivity growth and real wage stagnation in many developed economies.

• This has motivated work looking at the impact of international trade on thelabour market, but many fundamental questions are far from resolved.

• This paper offers complementary new evidence on connections between tradeand the labour market, taking an empirical approach that differs from existingwork.

Approach and Contribution

• The focus is on a big world event that sent shock waves globally – the EUreferendum vote of June 23, 2016 in the UK.

• The unexpected result of the vote induced an unprecedented overnight fall inthe value of sterling.• Biggest drop ever among the world’s four major currencies since the

collapse of Bretton Woods.

• Unexpected vote-induced sterling depreciation→ Trade→Workers

Trade and Worker Outcomes

• Exports are generally thought of as improving worker outcomes, but the effectof imports on workers is less clear.

• Early studies report a negative impact of imports on workers (Grossman 1987,Revenga 1992), but there is mixed evidence as the nature of imports haschanged.

• There has been a huge rise in trade in intermediate goods and services,and they now comprise two thirds of international trade. (Johnson andNoguera 2012)

• Workers may be hurt through easier offshoring of tasks, but they canbenefit through lower production costs from offshoring. (Grossman andRossi-Hansberg 2006)

• Imports hurt workers if they substitute for domestic labour, but can benefitthem if they are complementary: empirically, endogeneity andanticipation are “first-order” concerns for studying causal effects of tradeon workers. (Goldberg and Pavcnik 2016)

Summary

• Based on the pre-referendum trade structure and the referendum-inducedsterling depreciation across currencies, workers in industries more exposed tointermediate imports-weighted sterling depreciation→ Saw a bigger rise in their industry’s intermediate import price→ Experienced bigger cuts in wages and job-related education training.

• A 1% higher increase in the price of intermediate imports of an industrylowered wages by 0.35-0.55%, implying complementarity among intermediateimports and workers.

Real World (Yesterday)

Matthew Naylor, managing director of Naylor’s Flowers, said: the drop in the valueof the pound had reduced wages for workers. "On the ground, as a British employer,we don’t have the reputation we used to have as a place to better yourself," added MrNaylor. (Sky News 2019)

Advances

• This paper advances trade and labour market research by:• Studying the impact of trade on all workers in the economy, not just in

manufacturing. (Liu and Trefler 2011, Ebenstein et al. 2014)• Utilising the large currency depreciation to lever plausible exogenous

variation in imports, including in services. (Hummels et al. 2018)• Providing the first evidence of actual worker-level outcomes being

adversely affected by the current surge in nationalist politics(Auer et al. 2018, Fajgelbaum et al. 2019)

• The content of this work relates to two strands of literature• Impacts of trade, intermediate inputs/offshoring and exchange rates on

labour market outcomes (Feenstra and Hanson 1999, Campa andGoldberg 2001, Pierce and Schott 2016)

• Actual impacts of nationalist politics (Breinlich et al. 2017, Amiti et al.2019)

Structure of the Talk

• Context of Events of June 23/24, 2016

• Research Design and Data

• Results and Discussion

• Conclusions

EU Referendum

• On June 23 2016, UK voters were asked: “Should the United Kingdom remaina member of the European Union or leave the European Union?”• By 10pm, polling stations across the country closed and YouGov polls

suggested a 52% Remain win.• By 10.15pm, UKIP’s Nigel Farage conceded Remain "will edge it,”

sending sterling to its 2016 high of 1.5 against the dollar.• At 12.20am on June 24, Sunderland voted to Leave by a significant

margin. Sterling dropped more than on Black Wednesday.• By 1.30am, Brexit showed up in Google searches and bookmakers

changed their odds in favour of Leave winning the referendum.• Other Leave wins followed and by 2.17am, Nigel Farage tweeted he is "so

happy with the results in North East England".

• 72% of eligible voters cast a ballot and 52% of these chose “Leave”.

• Country ranking of depreciation is consistent with flight for safe haven assets• Fell more against Japanese Yen, US Dollar.• Forex investors moved to Gold, Government Bonds.

Sterling depreciation from the Brexit news shock

Figure 1

Table 1

EU Referendum - Exchange Rates

EU Referendum Sterling Depreciation Across Countries

Country Currency % Country Currency %

Japan Japanese Yen -11.1 Israel New Israeli Sheqel -6.8

United States US Dollar -8.0 Switzerland Swiss Franc -6.6

Saudi Arabia Saudi Riyal -8.0 Turkey Turkish Lira -6.5

Hong Kong Hong Kong Dollar -7.9 Malaysia Malaysian Ringgit -6.3

Thailand Thai Baht -7.6 Denmark Danish Krone -6.1

China Chinese Yuan -7.5 Euro Zone Euro -6.0

Singapore Singapore Dollar -7.4 Czech Republic Czech Koruna -5.9

Taiwan Taiwan Dollar -7.2 South Korea Korean Won -5.7

Russia Russian Ruble -7.2 South Africa South African Rand -5.3

India Indian Rupee -7.1 Hungary Hungarian Forint -5.2

New Zealand New Zealand Dollar -7.1 Norway Norwegian Krone -5.2

Australia Australian Dollar -6.9 Sweden Swedish Krona -5.1

Canada Canadian Dollar -6.9 Poland Polish Zloty -4.3

Research Design

• Initial trade-weighted depreciation for each industry→Trade prices→Wagesand job-related education & training.

• The reduced form approach has some similarities to recent papers on trade andlabour markets, which typically examine worker outcomes with initial trade ortrade policy exposure as explanatory variable across manufacturing industries(e.g. Schott and Pierce 2016).

Data

• The paper uses individual and industry-level data for the UK, combined withtrade data from a variety of sources

• Worker outcomes - wages and training - come from the quarterly Labour ForceSurvey (LFS)

• The time-frame of the analysis covers four years (sixteen quarters)pre-referendum (2012Q3-2016Q2) and eight quarters post-referendum(2016Q3-2018Q2)

• Data on trade comes from the Office of National Statistics (ONS), includingboth publicly available data and customized data obtained through freedom ofinformation requests.

• The import and export price indices are from ONS data (current price andchained volume measures).

• In order to construct the relevant industry-specific trade measures (85industries), we use data from UN COMTRADE and International Trade inServices (ITIS) for the year 2015 combined with the 2014 Input-Output tablefrom ONS.

• Observe trade shares Sdxo , Ssio for services trade; SsiSio for goods trade.

Difference-in-difference Estimates

Table 2 Intermediate imports weighted depreciation

Table 3 Exports weighted appreciation

Figures 1 to 4 Trade prices and Worker outcomes

Results - Intermediate Imports Weighted Depreciation

Post - Pre Referendum Changes

Intermediate Import Prices Export Prices Wages Training

(1) (2) (3) (4)

Highest Quintile 0.081 0.105 0.060 -0.008

(0.008) (0.010) (0.007) (0.003)

2nd Highest Quintile 0.043 0.118 0.075 0.003

(0.009) (0.009) (0.010) (0.002)

Middle Quintile 0.074 0.108 0.077 -0.002

(0.004) (0.012) (0.008) (0.003)

2nd Lowest Quintile 0.052 0.101 0.087 -0.003

(0.015) (0.013) (0.007) (0.003)

Lowest Quintile 0.037 0.102 0.087 -0.001

(0.007) (0.009) (0.008) (0.001)

Difference-in-Differences 0.044 -0.006 -0.027 -0.007

(Highest - Lowest Quintile) (0.010) (0.015) (0.010) (0.003)

Results - Exports Weighted Appreciation

Post - Pre Referendum Changes

Intermediate Import Prices Export Prices Wages Training

(1) (2) (3) (4)

Highest Quintile 0.052 0.097 0.077 -0.004

(0.017) (0.004) (0.009) (0.003)

2nd Highest Quintile 0.062 0.125 0.081 -0.001

(0.013) (0.015) (0.009) (0.002)

Middle Quintile 0.047 0.108 0.064 -0.004

(0.009) (0.006) (0.011) (0.002)

2nd Lowest Quintile 0.070 0.107 0.073 0.002

(0.007) (0.013) (0.008) (0.002)

Lowest Quintile 0.051 0.096 0.089 -0.002

(0.010) (0.007) (0.009) (0.002)

Difference-in-Differences 0.001 0.001 -0.011 -0.003

(Highest - Lowest Quintile) (0.020) (0.008) (0.013) (0.003)

Results - Intermediate Import Prices

Results - Export Prices

Results - Wages

Results - Training

Reduced Form Evidence

Table 4 Trade Prices

Figure 5 Intermediate Import Price Trends

Figure 6 Wage Trends

Reduced Form/First Stage - Trade Prices and ExchangeRates

Full Sample Restricted Samples

Excluding Excluding

Announcement QE

(1) (2) (3)

A. Intermediate Import Prices

Log(Intermediate Imports Weighted 0.375 0.411 0.526

Depreciation) X Post-Referendum (0.100) (0.107) (0.137)

B. Export Prices



Log(Exports Weighted 0.006 0.007 0.009

Appreciation) X Post-Referendum (0.016) (0.016) (0.019)

Controls, Time Dummies, Industry Dummies Yes Yes Yes

Sample Size 2040 1870 1360

Pre/Post Trends in Intermediate Import Prices

Pre/Post Trends in Wages

Reduced Form and IV Estimates

Tables 5 and 6 Wages

Tables 7 and 8 Training

Wages and Trade, A

A. Full Sample

Reduced Form IV Reduced Form IV

(1) (2) (3) (4)

Log(Intermediate Imports Weighted -0.201 -0.204

Depreciation) X Post-Referendum (0.075) (0.074)

Log(Exports Weighted -0.013

Appreciation) X Post-Referendum (0.014)

Log(Intermediate Import Prices) -0.515 -0.545

(0.251) (0.226)

Log (Export Prices) 0.075

(0.101)

First-Stage F Statistic 14.1 4.6

Controls, Time Dummies, Industry Dummies Yes Yes Yes Yes

Sample Size 123,489 123,489 123,489 123,489

Wages and Trade, B

B. Restricted Samples

Exclude Announcement Exclude QE


(5) (6) (7) (8)




(0.221) (0.175)



Sample Size 117,380 117,380 92,492 92,492

Training and Trade, A

A. Full Sample


(1) (2) (3) (4)






(0.073) (0.076)


(0.044)



Sample Size 578,282 578,282 578,282 578,282

Training and Trade, B




(5) (6) (7) (8)




(0.073) (0.053)



Sample Size 548,079 548,079 434,431 434,431

Skill Variations: Wages


Excluding Excluding

Announcement QE

IV IV IV

(1) (2) (3)

Log(Price of Intermediate Imports)× Graduates -0.616 -0.607 -0.601

(0.216) (0.191) (0.176)

Log(Price of Intermediate Imports)× Non-Graduates -0.216 -0.184 -0.042

(0.252) (0.225) (0.196)

First-Stage F-Statistic 6.8 7.3 12.8


Sample Size 123,489 117,380 92,492

Skill Variations: Training


Excluding Excluding

Announcement QE

IV IV IV

(1) (2) (3)

Log(Price of Intermediate Imports)× Graduates -0.205 -0.199 -0.148

(0.067) (0.067) (0.061)

Log(Price of Intermediate Imports)× Non-Graduates -0.118 -0.124 -0.023

(0.085) (0.087) (0.074)

First-Stage F-Statistic 6.9 7.4 11.3


Sample Size 578,282 548,079 434,431

Comparison - Offshoring Studies

• dlogW/dlogPM = θ̂MW = [−0.35,−0.55]• Offhsoring studies typically use trade values, instead of prices. Import demand

elasticity for intermediates in Alfaro et al (forthcoming) is -8.6.

• Compare with Hummels et al. (2014) study of offshoring rise on Danishmatched employer-employee manufacturing data.

Estimated Wage Elasticityθ̂MW /(−7.6) Hummels et al estimate

(1) (2)

Graduate 0.08 0.03 to 0.07Non-Graduate 0 to -0.03 -0.06 to -0.11

Graduate/Non-Graduate 0.08 to 0.11 0.09 to 0.18

Discussion

• The reduction in wages and training after the Brexit vote is the first piece ofevidence on the worker impacts of the recent surge in economic nationalism.

• The rationale that protectionist barriers will protect domestic production andundo the economic damage suffered by those who lost out earlier needs toaccount for the sharp rise in the fragmentation of production into global valuechains.

• In the long-term this disinvestment can jeopardize potential worker earningsand human capital development, particularly in the context of an economy withchronic skill shortages like the UK.

Conclusions

• The depreciation that resulted from the Brexit vote has significantly increasedthe costs for industries relying more on global value chains in their production.

• The response to this cost shock was a significant price pass through and theresultant higher costs of intermediate imports caused a relative fall in thetraining and wages of workers in the most affected industries.

• The decision to leave the EU (not even the actual exit) has already detrimentallyaffected workers’ welfare in a way contrary to the beliefs expressed by someabout the likely repercussions from the leave vote.

Origin Country Structure - Intermediate Import Shares

Destination Country Structure - Export Shares

Robustness - Inclusion of Pre-Referendum Import Shares,Wages Reduced Form

Intermediate Wages

Import Prices

First Stage Reduced Form IV

(1) (2) (3)

Log(Intermediate Imports Weighted 0.383 -0.205


Share of Imports in -0.035 -0.026

Intermediates X Post-Referendum (0.037) (0.025)

Log(Intermediate Import Prices) -0.430

(0.210)

First-Stage F Statistic 8.3


Sample Size 2040 123,489 123,489

Robustness - Inclusion of Pre-Referendum Import Shares,Training Reduced Form

Intermediate Training

Import Prices


(1) (2) (3)



Share of Imports in -0.035 0.003



(0.068)



Sample Size 2040 578,282 578,282

Robustness - Inclusion of Pre-Referendum Import Shares,Wages Reduced Form

Intermediate Wages

Import Prices


(1) (2) (3)



Share of Imports in -0.035 -0.026



(0.210)



Sample Size 2040 123,489 123,489

Robustness - Inclusion of Pre-Referendum Import Shares,Training Reduced Form

Intermediate Training

Import Prices


(1) (2) (3)



Share of Imports in -0.035 0.003



(0.068)



Sample Size 2040 578,282 578,282

Robustness - Intermediate Import Prices Reduced Formwith Import Competition Channel


Excluding Excluding

Announcement QE

(1) (2) (3) (4) (5)

Log(Intermediate Imports Weighted 0.375 0.350 0.383 0.490

Depreciation) X Post-Referendum (0.100) (0.091) (0.098) (0.128)

Log(Total Imports Weighted 0.169 0.147 0.165 0.214


Sample Size 2,040 2,040 2040 1870 1360

Robustness - Wages Reduced Form with ImportCompetition Channel


Excluding Excluding

Announcement QE

(1) (2) (3) (4) (5)

Log(Intermediate Imports Weighted -0.201 -0.187 -0.192 -0.177


Log(Total Imports Weighted -0.081 -0.068 -0.074 -0.066


Controls Yes Yes Yes Yes Yes

Time Dummies, Industry Dummies Yes Yes Yes Yes Yes

Sample Size 123,489 123,489 123,489 117,380 92,492

Robustness - Training Reduced Form with ImportCompetition Channel


Excluding Excluding

Announcement QE

(1) (2) (3) (4) (5)

Log(Intermediate Imports Weighted -0.069 -0.060 -0.065 -0.041


Log(Total Imports Weighted -0.055 -0.051 -0.046 -0.036


Controls Yes Yes Yes Yes Yes

Time Dummies, Industry Dummies Yes Yes Yes Yes Yes

Sample Size 578,282 578,282 578,282 548,079 434,431

Robustness - Pre-Post Referendum Changes in TradeQuantities


Excluding Excluding

Announcement QE

(1) (2) (3)

A. Intermediate Imports



B. Exports

Log(Intermediate Imports Weighted -0.461 -0.493 -0.639


Log(Exports Weighted 0.010 0.009 0.004

Appreciation) X Post-Referendum (0.053) (0.057) (0.066)


Sample Size 2040 1870 1360

EU Referendum - Exchange Rates - 7-Day and 15-Day

(a) 7-Day (b) 15-Day

Robustness - Wages with 7-Day Exchange Rate Window

Intermediate Import Prices Wages


(1) (2) (3)




(0.270)



Sample Size 2040 123,489 123,489

Robustness - Training with 7-Day Exchange Rate Window

Intermediate Import Prices Training


(1) (2) (3)




(0.084)



Sample Size 2040 578,282 578,282

Robustness - Wages with 15-Day Exchange Rate Window

Intermediate Import Prices Wages


(1) (2) (3)




(0.169)



Sample Size 2040 123,489 123,489

Robustness - Training with 15-Day Exchange Rate Window

Intermediate Import Prices Training


(1) (2) (3)




(0.076)



Sample Size 2040 578,282 578,282

Hours and Trade

A. Full Sample


(1) (2) (3) (4)



Log(Exports Weighted 0.009



(0.105) (0.104)

Log (Export Prices) -0.069

(0.039)



Sample Size 571,335 571,335 571,335 571,335

Hours and Trade




(5) (6) (7) (8)




(0.097) (0.088)



Sample Size 541,567 541,567 429,214 429,214

Overtime Hours and Trade

A. Full Sample


(1) (2) (3) (4)






(0.176) (0.168)

Log (Export Prices) -0.122

(0.049)



Sample Size 578,282 578,282 578,282 578,282

Overtime Hours and Trade




(5) (6) (7) (8)




(0.163) (0.120)



Sample Size 548,079 548,079 434,431 434,431

Robustness - Wages Of All Workers

A. Full Sample


(1) (2) (3) (4)






(0.312) (0.287)


(0.142)



Sample Size 159,957 159,957 159,957 159,957

Robustness - Wages Of All Workers




(5) (6) (7) (8)




(0.271) (0.233)



Sample Size 152,065 152,065 119,953 119,953

Robustness - Time Window and Alternative TrainingMeasure

Excluding Observations Received training in

Close to Referendum Last Three Months

Wages Training Training - 3 months

IV IV IV

(1) (2) (3)

Log(Intermediate Import -0.489 -0.176 -0.319

Prices) X Post-Referendum (0.252) (0.071) (0.139)

First-Stage F Statistic 13.5 13.9 14.1

Controls Yes Yes Yes

Time and Industry Dummies Yes Yes Yes

Sample Size 121,954 571,049 578,282

trade and worker deskilling trade and deskilling...other leave wins followed and by 2.17am, nigel...

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