Workers Beneath the Floodgates: The Impact of Low-Wage Import Competition and Workers' Adjustment

Abstract

I analyze the impact of a low-wage trade shock on manufacturing workers in a high-wage country, Denmark, and their subsequent adjustment to the shock. Employing a comprehensive person-level panel dataset matched with workplace-level employer data for the period 1999 to 2010, I exploit the dismantling of import quotas on Chinese textile and clothing products in conjunction with China's accession to the WTO as a quasi-natural experiment and utilize within-industry heterogeneity in workers' exposure to this trade shock. Results reveal negative and significant impact of the low-wage import shock on workers' future earnings and employment trajectories. The main channels through which the trade shock affects workers are shortened employment at the firm that was exposed to the competition shock and subsequent difficulty in maintaining stable employment. The abolishment of quotas also leads to higher likelihood of unemployment. The service sector is the main absorber of exposed workers of all types, but the success of recovery from the shock in subsequent service sector jobs varies greatly across workers depending on initial occupation, education and age. Less-educated, older and workers who had occupations that require industry-specific skills at the exposed firms had the worst adjustment experience. The results show that trade-induced adjustment costs are substantial and heterogeneous across different types of workers and highlight the nature of adjustment frictions by showing that, for some, challenges remain even after transition to full-time jobs outside of manufacturing.