What impact does international free trade have on the Illinois economy? Is it mostly good, mostly bad, or somewhere in between? How can Illinois capitalize on the benefits of trade while mitigating the losses? A new report by the Illinois Economic Policy Institute and the Project for Middle Class Renewal at the University of Illinois at Urbana-Champaign investigates.
The Full Report, The Costs and Benefits of International Trade in Illinois: Estimating Impacts on Manufacturing and the Economy, is available here [PDF].
There has been a general consensus among economists that international free trade is an important source of economic growth for countries. International trade allows nations to specialize, promotes innovation, and has led to higher income growth and longer life expectancy. However, recent evidence finds that trade hurts local jobs and worsens income inequality. Mass job displacement can have significant effects on the national economy and public budget.
International trade supports many American jobs, especially high-skilled service occupations. In fact, international trade supported 1.8 million more jobs in 2014 than in 2009. However, international trade has negatively affected the number of manufacturing jobs in the United States. The United States has lost about 4.5 million manufacturing jobs since the ratification of NAFTA in January 1994. U.S. trade with China alone has accounted for between 1.5 million and 2.4 million American manufacturing jobs lost.
It is thus no wonder that the American electorate has become divided on whether the free trade has positive or negative impacts on the economy. A recent FiveThirtyEight poll, shown below, demonstrates the national divide.
What impact does international free trade have on the Illinois economy? Is it mostly good, mostly bad, or somewhere in between?
As the 5th-largest exporter state and the 6th-largest importer state in the nation, Illinois is particularly exposed to international trade. Manufacturing employment in Illinois today is now 15% lower than it was a decade ago.
Due to both trade and automation, the number of factories in Illinois has increased by 6% and manufacturing output in Illinois has increased by 2% since January 2006, even though manufacturing employment has declined by 15% over that time. New factories are opening in Illinois, but they are using automated technologies that require less human labor.
The result has been mass displacement of manufacturing production workers in Illinois. From 2010 to 2015, more than 270,000 Illinois workers in manufacturing production occupations were separated from their jobs, including those who voluntarily left their jobs and those who were fired.
- 43% became employed in other occupations in Illinois – especially in transportation and moving materials careers, food preparation and food service jobs, office administration and support jobs, and construction occupations;
- 13% left to become students and upgrade their skillsets for new careers;
- 18% were unemployed; and
- 27% retired or otherwise dropped out of the labor force entirely.
The vast majority of displaced blue-collar production workers suffered a pay cut. The average annual income of displaced production workers in these new jobs is $36,300 per year, or $7,673 (17%) less than the earnings of current blue-collar production workers in Illinois.
The combined impact of production worker displacement and increased manufacturing output is a net 1,510-job drop in total employment every year in Illinois. Many of the 47,000 workers that are displaced every year find other jobs, even though most are lower paying. This makes the jobs impact of production worker displacement appear smaller in the economic data. Meanwhile, the added productivity of manufacturing companies helps to create new jobs and offset the displacement of production workers. Still, the displacement causes a drop in consumer demand that results in more jobs lost than gained. However, the two trends cause a net $1.16 billion increase in Illinois’ economy every year.
This is the paradox of international free trade: While trends in manufacturing have caused total employment losses in Illinois, they have expanded the state’s economy.
The gains from trade have become concentrated amongst the wealthy. Workers displaced from jobs that once paid a living wage have been forced to find employment in other, mostly low-paying, sectors of the economy. The overall impact has been to widen the income gap between the rich and the poor in Illinois.
What can Illinois do to re-develop its manufacturing sector?
Illinois must prepare its workforce for the future. Manufacturing is a critically important industry to develop. Manufacturing employment is typically higher-paid, generates increased economic value, and triggers additional employment to support manufactures.
At the state-level Illinois can take at least six steps:
- Foster a better-educated and trained workforce. An increase in the number of workers with a bachelor’s degree or higher “correlates to fast labor productivity growth” in manufacturing sector. Developing a future manufacturing base requires a highly-educated populace with innovative thinkers and skilled workers who can keep Illinois globally competitive.
- Promote increased research and development. Without interfering directly into the market, governments in Illinois can enable manufacturing growth by supporting additional basic research and development.
- Significantly improve transportation infrastructure. A globally-competitive Illinois economy depends on effective and efficient transportation infrastructure. The state needs sustainable, reliable funding to promote long-term economic development.
- Base energy decisions on Illinois’ competitive advantages. Manufacturing is an energy-intensive industry, and Illinois becomes more attractive to manufacturers when energy prices are low. Fortunately, industrial electricity prices in Illinois are lower than the national average. To reduce energy costs even further, the state should invest in natural gas, which is a “cleaner” source of energy than coal or oil.
- Embrace and capitalize on increasing demand for clean energy. Illinois has the 5th-highest solar energy resource potential in the nation and currently ranks 5th in installed wind capacity. Clean energy is a market opportunity for Illinois manufacturers.
- Develop a state educational and consultative capacity in “reshoring” expertise. Illinois should consider utilizing its public university system to form an entity invested with the requisite resources and consultative business strategies to help bring well-paying manufacturing jobs back to the state.
Where displacement of production workers does occur, protecting the state’s prevailing wage law in the construction industry, making college more affordable and accessible, and increasing investment in worker retraining programs would help lift up workers who transition to other occupations. Raising the minimum wage would also help many displaced manufacturing workers who are forced to find work in food service, food preparation, and building and grounds crew occupations.
What’s the takeaway?
International free trade and technological advancements provide substantial benefits to the Illinois economy. Mitigating the losses of these positive forces, especially on the manufacturing industry, is crucial to the future success of Illinois.