Department of Economics

EC981 MSc Dissertation

The effect of import competition on employment in

U.S. manufacturing industry between 2002 and 2011

BY
MUBARIZ HUSEYNOV
1206023
SEPTEMBER, 2013

TABLE OF CONTENT
Acknowledgements -------------------------------------------------------------------- 3
Abstract ---------------------------------------------------------------------------------- 4
Section1. Introduction ----------------------------------------------------------------- 5
Section2. Literature review ---------------------------------------------------------- 8
2.1 Theoretical excursion: the effect of import competition on employment ---8
2.2 Empirical evidence ------------------------------------------------------------------ 9
- The earlier studies about the employment effect of import
competition in US manufacturing industry ------------------------------------------ 9
- The effect of import penetration from developing countries on
employment in US manufacturing industry ---------------------------------------- 13
- How do the imports from China affect to employment
of US manufacturing sectors -------------------------------------------------------- 14
- The effect of import competition to manufacturing
employment in other developed countries: UK and Japan ----------------------- 15
2.3 Conclusion -------------------------------------------------------------------------- 16
Section3. Methodology --------------------------------------------------------------- 18
3.1 Data description -------------------------------------------------------------------- 18
3.2 Empirical model specification and technique ---------------------------------- 19
Section4. The results ----------------------------------------------------------------- 22
Section5. Conclusion ----------------------------------------------------------------- 25
References ------------------------------------------------------------------------------ 26
Tables ----------------------------------------------------------------------------------- 29

Acknowledgements
Apart from my efforts, the success of this study depends on the encouragement from my
parents and my supervisors valuable guidelines.
I would like to express the deepest appreciation my supervisor Dr. Holger Breinlich for the
helpful comments, remarks and useful suggestions about this thesis.
Furthermore, I would like express my sincere gratitude to my family for their endless love
and constant support for the entire period of my MSc study in the U.K.
Last but not least, special thanks are given to Azerbaijan Republic Ministry of Education.
Without its financial supports, it is impossible for me to graduate master degree education at
University of Essex.

ii

Abstract
This paper examines the effect of import competition on employment in the United States
manufacturing industries between 2002 and 2011. This paper employs the panel dataset that
includes observations of 360 six-digit NAICS code U.S. manufacturing industries. I found
negative and statistically significant correlation between the import competition and
manufacturing employment. In other words, the number of production workers declined by
24% between 2002 and 2011, and 6.9% decrease was associated with increasing import
competition.

Keywords: Imports, Employment, Manufacturing

iii

Section1. Introduction
During last three decades, the United States has become an open economy with a steady
increase reflecting to rising import competition within manufacturing sectors and U.S.
manufacturing employment dropped steadily (Revenga, 1992, Sach and et al, 1994).
Employment is one of the variables of domestic firms that competitive pressure of imports
has an essential influence on it. The level of employment in U.S. production began to decline
since 1980s, this tendency picked up speed in the mid-1990s and considerably accelerated in
the 2000s (Acemoglu et al, 2013). Among the other trends, imports have observed to rise
significantly as a share of U.S. domestic output within manufacturing over the same years
period.
Many observers have linked trade openness of U.S. economy to trends of U.S. labour
market. The Hecksher-Ohlin Theorem supposes that the countries will export the factors that
they are abundant in it, import the factors that they are deficient in it. U.S is relatively
abundant in high skilled labour and a net exporter of skill-intensive goods, in accordance with
the predictions of the H-O theorem (Gregory, 2001)
The Heckscher-Ohlin-Samuelson model predicts that in global competition, the U.S.
manufacturing sectors will suffer loss against developing countries that are plentiful in lowskilled workers. Suggesting with this theorem, Sach and et al (1994) also concluded that a
change in trade patterns was associated with the loss of low-skilled employment in
production.
Change in comparative advantage causes movements of resources from decreasing sectors
to expanding sectors. The decline in employment is associated with the reallocation of
activity within manufacturing industries that follow the predictions of endowment-based
trade theory and the U.S. firms respond to the international competition (Bernard et al., 2004).
According to H-O-S theory, in the United States, an expansion of capital or skill intensive
industries, and decrease in labour intensive industries should be attributed with increases in
international trade.
These opposed trends have led some observers to attribute the decrease in manufacturing
employment with rising import competition. The role of import competition in these trends
remains unclear. While some studies characterize increasing international competition with
changes in import prices, others used changes in import share relative to domestic production
1

to measure trade change. Previous empirical studies found ambiguous results whether, some
research argued that there is negligible correlation between import competition and
employment (e.g. Grossman, 1987; Mann, 1988) while others concluded a negative
correlation between imports and employment growth (e.g. Freeman and Katz, 1991, Sachs
and Shatz, 1994, Wood, 1995). Revenga (1992) expanded Grossmans methodology and
concluded that import price positively was correlated with a change in industry employment.
Because of more pressure from trade with less developed countries on manufacturing
sectors in United States, a sharp decrease in manufacturing employment was the critical
concern. Imports from less developed countries were the main causes for the decline in U.S.
manufacturing employment (Kosteas, 2007). To the extent that competition with low income
countries forces U.S consumption to shift from domestically-manufactured to imported goods
(Hine and Wright, 1998). As a result, more skill- and capital-intensive sectors developed, and
it became impossible for U.S. firms to benefit producing labour intensive goods because of
their high relative wages. Between 1972 and 1996 imports share from low-income countries
tripled and it caused half million decline in manufacturing workers number (Kosteas, 2007).
Recent research argued that a significant portion of this decline was due to the rising U.S.
exposure to China imports (Pierce and Schott, 2012; David, 2012; Acemoglu et al, 2013).
The rising import from China between 2001 and 2007 is more than as twice as that between
1991 and 2001 (Acemoglu et al, 2013). Although U.S. exposure to Chinese imports declined
during the Great Recession, then it increased and even surpassed its 2007 amount (Acemoglu
et al, 2013).
This study criticizes whether increasing import share has contributed to the decline in U.S.
manufacturing employment. Although previous studies found significant results and
suggested critical implications, U.S. import data with two and four-digit data limited their
investigation. Therefore, we will analyse the effect of import competition on U.S.
manufacturing at disaggregated six-digit level data controlling for industry factors.
This paper employs manufacturing industries dataset with industry level imports data and
an industry level shipment of 360 six-digit NAICS (North American Industry Classification
System) U.S. manufacturing industries to analyse the impact of import competition on the
industry level employment between 2002 and 2011. This period is of interest because, the
import penetration ratio in U.S. manufacturing sector rose by 6.3% (table 2) while the
domestic production from manufacturing industries increased by 29.6 % (table 3) between
2

2002 and 2011. Over the same period, the number of production workers declined by 24 %
(table 4). These opposite swings provide a natural experiment to examine the relationship
between the increase in import competition and decline in industry employment. Other
variables that also affect to employment change are not included in the model because, they
are less relative to this analysis, although they are necessary to include.
My investigation is descriptive rather than causal, and it serves to unfold the correlation
between U.S. manufacturing employment and increasing import penetration in the economy
because I will not address the reasons of shifts in import flow. Estimating parameters of
straightforward empirical model, we can reveal that how changes in import as a share of
domestic output are associated with a change in domestic employment, controlling for the
other variables that affect this relationship. This paper suggests that the number of production
workers declined by 24% during the last decade, and 6.9% decrease is associated with
increasing import competition. While this result is consistent with some earlier studies, for
example, Kletzer (2002) who found also strong and negative correlation between imports and
industry employment, but it contrasts to Grossman (1987), Mann (1988), Campa and
Goldberg (2001) and Dekle (1998) who found a small effect of import competition on
manufacturing employment.
The remainder of the paper is organized as follow. Section 2 details the theoretical
background and summary of earlier studies. Section 3 describes the data sets, empirical
model specification and technique. Section 4 presents the results while section 5 concludes.

Section2. Literature review

2.1 Theoretical framework
In this chapter, I will review the basics of international trade theory focusing on theories
relevant to the relationship between import and jobs replacement. This theory provides a
theoretical framework about how changes in the competitive international trade impacts
domestic labour. Then I turn to a discussion of empirical results of import competition.
The essential cause of trade is the differences in prices across countries due to the different
costs of production. As a trade decreases the resource costs of production to the minimum, it
maximizes the real value of world resource production reflecting the specialisation of
countries in those economic activities that make the best use of its resources. The economic
name of these differences in the cost of production is comparative advantage introduced by
David Ricardo in his Principles of Political Economy (as cited in Kletzer, 2002). The
primary prediction of Ricardos model is that trade will occur between two countries when
these countries export the goods in which they have a comparative advantage. A country has
a comparative advantage in producing a good if the opportunity costs of producing that good
in terms of other goods is lower in that country than it is in other countries (Krugman et al,
2012, p. 26). Then this international trade model was developed by Eli Heckscher and Bertil
Ohlin. The main difference between two models is that while Ricardos model is based on
differences in technology, the Heckscher-Ohlin theory used country differences in factor
endowments. Then the latter theory was quite clearly extended and refined in the two-factor,
two-good Heckscher-Ohlin-Samuelson design.
In the perfect competitive case, rising demand causes an increase in imports. There are two
cases when trade is measured as quantity flow (Kletzer, 2002): first, when foreign supply is
more elastic than domestic supply, import share also increases because the increase in
imports will outstrip the increase in domestic output. Second, if the elasticity in domestic
supply exceeds it in foreign supply, the rising imports cause the decreasing import share.
These two cases reveal that the differences in the competitiveness as well as differences in
supply elasticity between domestic firms and foreign firms cause change in import share
across industries.
In the standard the Heckscher-Ohlin model, as import prices fall, industries fail against
import competition. The effect of import competition on industry employment is
4

straightforward. As the price of goods imported from other countries falls- implying
increased import competition, it reduces employment in the sectors in which same goods is
produced domestically. Employment can be decreased to desired level when wages adjust to
equate supply and demand of labour. Change in wage and employment depend on supply and
demand elasticities. Job displacement will occur when reduction in price is more profitable
for the firm to stop than to continue to produce (Kletzer 2002)

2.2 Empirical Evidence

The earlier studies about the employment effect of import competition in
US manufacturing industry
To characterize the impact of trade changes and foreign competition on domestic
employment, while some studies used changes in import prices (e.g. Grossman 1987 Revenga
1992 etc.), others used shifts in import share or net import (e.g. Mann 1988; Freeman and
Katz 1991; Sach and et al 1994; Kletzer 2002 etc.). However, most of the studies found same
results that there is a negative relationship between import competition and employment,
though they used different methodologies and databases in different years or extended and
refined previous methodologies.
Krueger (1979a, 1979b, 1980a and 1980b), Frank (1977), Cable (1977) and Wolter (1979)
have argued that, relative to other structural changes that occur in a dynamic economy due to,
for example, differences in the rates of technological progress across sectors, differences in
the income elasticities of demand across goods and differences in the rates of accumulation of
alternative factors of production, import competition has been only a minor factor in labor
displacement (cited in Grossman 1987, pp. 2)
Grossman (1987) argues that this methodology is seriously improper and does not have
general strength. Their accounting approach can contribute labour reallocation to
technological change that accelerated by strengthening of import competition under the
condition of factor substitution in production. Another default of their accounting proposition
is that it characterized import pressure by the share of imports in domestic consumption
(Grossman 1987). He also suggests that difficulty side of this measurement is that this share
variable shifts not only with a change in the foreign supply curve for imports, but also with
5

changes in conditions of supply in the domestic industry. Grossman (1987) develops

alternative methodology based on ordinary least squares (OLS) and/or two-stage least squares
(2SLS) estimates of elasticities of wage and employment with respect to industry-level
import price indices to estimate the impact of import competition on wages and employment
in nine U.S. manufacturing industries over the period 1967-1979. Advantage of this
approach is that it allows direct measurement of the sensitivity of sectoral employment and
wage levels to shifts in the supply of imports (Grossman 1987, p. 2). He finds that import
prices affects employment in only one of eight industries and affects wages in only two of
eight industries. Thus, he concludes that changes in import prices have small but significant
effects on employment and wages.
Revenga (1992) investigates whether increased import competition has been a significant
factor behind declining employment and sluggish real wage growth in U. S.
manufacturing. Based on unbalanced panel data of 38 three and four-digit SIC manufacturing
industries between 1977 and 1987, he follows up on Grossmans methodology and reports
that changes in import prices has a significant effect on employment and a small yet
significant effect on wages.
In his paper, Revenga (1992) uses ordinary least squares (OLS) and/or two-stage least
squares (2SLS) to estimate the effect of import price indices on wages and employment at the
industry level. She finds OLS estimates of the import price elasticities to be significantly
downward biases, which explains that result of previous studies about employment effect of
import competition was weak.
Evaluating the effect of both changes in export and import prices on employment and
wages of production workers, Hakura (1997) analyses the impact of foreign trade on
employment and wages in the US between 1980 and 1990. He suggests that, while the
increased import competition causes a decline in employment and wage levels, but it
increases in other industries that expand and grow from increased exporting opportunities.
Thus, it is necessary to examine the effect of export prices as well as import prices in order to
capture the overall impact of trade (Hakura 1997). Ignoring the fact that many sectors in the
U.S. economy export their product and benefit from trade, Grossman (1987) and Revenga
(1992) uses import prices as an indicator for a degree of the import competitiveness of U.S.
industries to investigate the elasticity of sectoral employment and wages to changing import
competition. Grossman (1987) and Revenga (1992) show that, a decline in the domestic price
6

of an imported good shifts demands curve downwards. Thus, employment reduces in

domestic industries. Hakura (1997) argues that import competition in the form of low import
prices reduces employment and the total output demand for import competing industries.
However, at the same time, if industries can export their own product, employment would be
expected to increase in industries since rising foreign demand for a product causes an
increase in export price of that product. Hakura (1997) uses an adjusted version of
Grossmans methodology following Haveman (1992, cited in Hakura (1997)) based on data
of 12 three-digit standard industrial classification U.S. manufacturing sectors during 1980-90
years period. He finds that a trade price does not significantly affect employment and wages
in most of the sectors analysed. Furthermore, the employment effects of export prices tend to
be larger than the employment effect of import prices, implying that export prices have a
larger effect. Finally, the coefficients are larger in the employment regressions than in the
wage regressions, suggesting a larger impact of trade prices on employment levels than on
wage levels. Hakura (1997) concludes that there may be an alternative explanation; primary
changes in technology caused a significant increase in job destruction shifts labour
displacement away from production sectors and toward to non-production industry sectors.
Freeman and Katz (1991) and Davis et al. (1996) also emphasize the main role of export
index in quantifying the effect of international trade on employment. Using data of 428 fourdigit SIC manufacturing industries from 1958 to 1984, Freeman and Katz (1991) find that 10
percent increase in import is associated with 5-6 percent reduction in employment. However,
the relationship between employment and export is positive. However, comparing to
correlation between imports and employment, it is negligible.
Davis et al. (1996) explore high rates of job displacement for plants in import competitive
industries between 1972 and 1988. They find 2.8% reduction in industry employment where
import penetration ratio is very high. Besides, there is a small difference in labour
displacement or employment shifts when the industries are listed by export share.
Kletzer (2002) find the strongest relationship between employment change and the risk of
job displacement amongst the set of small traditionally import-competing industries analysing
change in manufacturing during 16 years period, 1979-1994. He concludes that import price
relative to domestic supply rose from 6.6 percent in 1975 to 17.1 percent in 1994. It causes
employment share of manufacturing to decrease by 31.2 percent.

White et al (2006) investigate the effects of import competition on the estimated

displacement probabilities and variation in displacement probabilities across worker types
using individual worker observations within 1984-2000 Displaced Worker Surveys. This
source produces a data set that contains thirty-two types of 101,187 worker observations and
industry trade data for 77 manufacturing industries from U.S. International Trade
Commission trade database and NBER Trade Database. They also use import and export
price index data for 29 industries from International Price Program of U.S. BLS. They
suggest that changes in import penetration rates and import prices exhibit a positive impact of
import competition on displacement probabilities. They also find that reductions in import
price index values are correlated with higher displacement rates. Furthermore, non-union,
lesser-educated, female and minority workers are more affected by the job displacement.
Kosteas (2007) estimates the effect of imports on employment in US manufacturing
industries for production and non-production workers using Arellano-Bond estimator1 based
on manufacturing industries dataset with industry imports data and data on the portion of
imports from low wage countries for two time periods, 1980-1988 and 1989-1996. He
focuses on technique effect of international trade on employment which represents changes in
employment relative to a change in production technique. Production technique is the
independent of the level of output. Kosteas (2007) finds that increasing imports are
negatively correlated with total employment in the 1980s. This evidence does not strongly
support that there is strong impact of import on production due to non-production
employment. Kosteas (2007) finds the same result for the second period, but the effect is
limited to non-production workers.
Unlike authors mentioned above, Oskooee and Chakrabarti (2003) find that import
competition is positively correlated with manufacturing employment. Using data of quarterly
and spin 12 two-digit SIC manufacturing industries over the period of 1977-1992, they
estimate employment elasticities with respect to import price and investigated whether
employment in US manufacturing sector shows any long run relationship with import
penetration. The results are not stable. When the employment is measured by the average
person hours per week, employment is positively associated with import price only in six
industries. When the employment is measured by the number of production workers, only
seven manufacturing sectors show a significant positive correlation between employment and
Which differences the data and uses lagged values of the independent variables as instruments (Kosteas,
2007, pp. 12)
1

import price. In total, there is significant positive correlation between employment and import
prices in eight sectors.

The effect of import penetration from developing countries on

employment in U.S. manufacturing industry
Following studies investigated the main cause of the deteriorating situation of unskilled
workers in U.S. after expanding trade with developing countries that are the major concern in
current years.
Sach et al. (1994) calculate the effect of the change in trade on the employment of nonproduction and production workers between 1978 and 1990. They find that import from
developing countries reduced low skilled workers by 6.2% and employment of higher skilled
workers by 4.3%. Sach and Shatz (1996) note that reduction in employment of importcompeting manufacturing reallocated workers into the non-traded sector that leads to a
decrease in the relative wage of unskilled workers.
In his paper, Wood (1995) also argues that the major cause of a decline in the number of
unskilled workers in developed countries was the increasing import penetration from
developing countries. He finds employment effect of trade with developed countries to less
skilled workers that it is three times larger than the impact found by Sach et al (1994).
Belman and Lee (1996) find that increased import competition from labour abundant
developing countries has a negative impact on U.S. employment. This effect is larger several
times than the wage effects, and this connection is stronger than positive connection between
export and employment.
Using a factor proportions model, Borjas and et al. (1997) suggest that increase in import
competition from less-developed-countries has a positive impact on less-skilled labour.
Bertrand (2004) investigates the relationship between exogenous shocks to international
competition and sensitivity of current wage to the unemployment rate using individual-level
labour data sets of a Panel Study of Income Dynamics extract and repeated cross-sectional
data set of Current Population Survey extract between 1976 and 1992. He shows that an
increase in import competition increases the elasticity of workers current wages to the current
local unemployment rate, but decreases the elasticity of current wages to the unemployment
rate prevailing at the time that the worker was hired. This modification is stronger among
9

more financially constrained industries than among less-constrained ones. In this article
Bertrand (2004) also suggests that policy makers have to concentrates on the overall result of
globalisation not only on the change in the demand for labour but also on the nature of the
employment contract to characterize the impact of foreign competition on labour market
In a recent study, using plant level manufacturing data, Bernard et al (2004) examines the
impact of import penetration from low-wage countries. He finds that trade decreases plant
growth of industries faced with low wage competition and causes a shift in market share
towards more capital intensive firms

How do the imports from China affect employment of US manufacturing

sector
Following studies will present a comprehensive estimation of the role played from China
in the U.S. economy.
Pierce and Schott (2012) examine the relationship between the sharp drop in U.S.
manufacturing employment after 2001 and U.S. granting of permanent normal trade relations
to china in October 2000, a few months before the march 2001 business-cycle peak using
manufacturing employment dataset from U.S. census Bureaus Longitudinal Business
database. They show that the US manufacturing sectors exposure to Chinese exports
increased from approximately 1.5 percent in 1991 to over 6 percent by 2009, following
chinas penetration to the world trade organization. Furthermore, they find that reductions in
import-tariff uncertainty have negative and statistically significant effect on relative industry
employment growth during six years after 2001 business-cyclical peak.
David et al (2012) analyse changes in manufacturing and nonmanufacturing employment,
earnings, and transfer payments across U.S. local labour markets to changes in U.S. market
exposure to Chinese import competition. They use data from the UN Comrade Database on
U.S. import at six digit HS product level between 1990 and 2007 years. They suggest that the
considerable increase relative to earlier decades was related to a rapid increase in U.S.
exposure to trade with China and other developing countries economies over this period.
The export surge from China is the outcome of a significant expansion in its production
capacity (Naughton, 2007), and this country has accounted for over three quarters of the
increase in manufacturing value added by low and middle income countries ( Hanson ,2012),
10

as the share of export from china in the world production increased to 12% in 2007, and 16%
in 2011 following the increased climb from 2% to 5% between 1990 and 2000 ( Acemoglu,
2013)
For U.S. manufacturing, Chinas expanding role in global trade is a major shock. Not only
is Chinas export growth concentrated in the sector buts its growth in imports, in particular
from the United States and other high income countries, has been comparatively sluggish,
reflected in Chinas sizable positive trade balance that has been more or less matched in the
United States by persistent negative trade balances ( Acemoglu, 2013, p.2)
Acemoglu and et al (2013) explore the relationship between the rise of import competition
from China and US employment sag of the 2000s. They use data on US import values at the
10-digit HS level over the period of 1995-2005 and data on US employment is the Country
business pattern that is an annual data series that provides information on employment, firm
size distribution, and payroll by county and industry. Their results suggest that the rising
import competition from China, which enhanced after 2000, directly caused 16 % decline in
US manufacturing employment dropping in number of firms, reduction in employees per firm,
and decline in both production and the non-production employment. Their estimates also find
the same correlation between import competition and job destruction in nonmanufacturing
industries.

The effect of import competition to manufacturing employment in other

developed countries: UK and Japan

Hine and Wright (1998) show that trade has a negative effect on UK manufacturing
employment if it originates from the US and the EU than from the developing countries and
in particular from East Asia.
In their paper, using the open Leontief input-output model, Gregory et al (2001) attribute
the shift in skill structure if employment to the international trade and technological
development. They explore that technological change was the main cause in the destruction
of low-skill jobs. Comparison to technological change, trade has a smaller impact on
employment in UK over the period 1979-90. Their finding is broadly consistent with Sachs
and et al (1994), although they used different methodologies. They also find that unskilled
11

jobs in the service sector are expanded much more rapidly in the US than in the UK, because
of the labour market institutions in UK inhibited the expansion of the low skilled employment
The relationship between import competition and industry employment has not been
analysed in Japan as U.S because the economy of Japan did not experience considerable
instability in employment. However, the unemployment has become a serious concern for
households and policy makers during the yen-appreciating recession after 1993. It is
suggested that yen instability has considerable effect on manufacturing employment in Japan
(Dekle 1998)
Rebick(1999) reports that the import share has negligible impact on employment
investigating 18 two-digit industries with five-year intervals in Japan. Expanding this data to
22 industries, Tachibanaki et al (1998) detects same findings and attributed this relationship
with the imports from China.
In Tomiura (2001), the effect of imports on demand elasticity of labour market in Japan is
examined. Using four-digit longitudinal data of 390 Japanese industries, based on the data
accordance between import statistics and Japans Annual survey of Manufacturers, she finds
that there is positive significant correlation between import prices and manufacturing
employment in Japan.

Section2.3. Conclusion
In summary, a standard Heckscher-Ohlin model predicts that when import prices fallincrease in import causes a decrease in employment of industries with the rising share of
imports in domestic supply.
Most of The evidences support this theory suggesting that import competition is negatively
associated with U.S. manufacturing employment. While some studies argue that imports have
negligible impact on employment (e.g. Grossman 1987), others find manufacturing
employment to be strongly correlated with imports (Kletzer 2002), due to the databases in
different years and different methodologies
Earlier studies that examined the impact of imports from developing countries on industry
employment are also consistent with H-O-S theorem. Furthermore, imports from less
developed countries affect more to production sectors than non-production sectors.
12

Comparison to other developing countries, import competition from China directly causes a
decline in both production and non-production employment. Additionally, increase in U.S.
exposure to trade with China is associated with job displacement in nonmanufacturing sectors.
In other developed countries namely, the United Kingdom and Japan the relationship
between import competition and manufacturing employment is similar to it in the United
States and consistent with H-O-S theorem.
The results are also ambiguous because the difference in effect of import competition on
employment depends on the analysis period. While some studies argued that there is a
considerable relationship between imports and manufacturing employment and it is
associated imports from China, others suggest this effect is negligible.

13

Section3. Methodology
3.1 Data description
This study examines the employment, import penetration data for a panel of 360 six-digit
level NAICS (North American Industry Classification System) codes manufacturing
industries during the sample period of 2002-2011. The observed period of data is from 2002
to 2011 with 3600 observations (360 industries for 10 years).
This paper employs the employment data from County Business Patterns (CBP) that
provides subnational economic data by industry. This database includes the number of
establishments, employment, first quarter payroll and annual payroll from 1998 to 2011.
To assess the effect of import competition on U.S. manufacturing employment this study
uses import penetration ratio and import share as explanatory variables in the analysis. Import
penetration ratio is measured as total imports divided by the sum of industry output plus
imports. Import share is measured as total import divided by industry output. The industry
shipments are based on industry shipments published by the US Census bureau and reported
in the Census of Manufactures, The Annual Survey of Manufactures, and the Manufactures
Shipments, Inventories and Orders (M3) survey. The data in which statistic was prepared by
the Industry Economic Accounts Directorate, Bureau of Economic Analysis (BEA), U.S.
Department of Commerce contains annual statistics of industry shipments for detailed
manufacturing industries for 1998-2011. The production import data is downloaded from
Census 2000 EEO Data Tool, U.S. Census bureau with North American Industry
Classification System (NAICS) code.
Data coverage and the length of my period are main limitations of this study. It was quite
difficult to get total import data on all the US manufacturing industries between 2002 and
2011. Although I found data of total industry shipment and employment over the period
1998-2011, but there are not available data of import during given observed period. Because
of the lack of import data, taking into account other existing data, I investigate the effect of
import competition on employment between 2002 and 2011 years.
Table 1shows about 78% increase in imports relative to the domestic industry output in
U.S. manufacturing sector between 2002 and 2011. Table 2 visualizes the average changes in
import penetration ratio within 360 U.S. manufacturing industries in percentage. Table 3
14

summarizes the domestic production of U.S manufacturing industries during estimated years.
Domestic production increased by approximately 29.6%. Table 4 describes the change in the
average number of U.S. manufacturing workers between 2002 and 2011. Comparison to
import share and industry output, there is observed 24% decline production workers.
Table 9 describes the summary statistics of employment, import penetration ratio and
import share, namely; number of observations, mean, standard deviation, minimum
maximum, skewness and kurtosis

3.2 Empirical model specification and technique

The model linking relationship between import competition and industry employment is
theoretically straightforward (Revenga, 1992; Oskoee and Chakrabarti, 2003; Kletzer, 2002).
This paper does not consider relative employment movement, but it concentrates only
changes in employment through manufacturing industries. The determinants of import
competition are presented by import penetration ratio and import share. The difference
between them that I will show in the formal definition is that to measure the import
penetration ratio, the total imports are divided by the sum of industry shipment plus imports,
comparing to import share.
This paper uses quite simple empirical framework for estimating the correlation between
changes in employment and import competition. The following equation is a basic reducedform equation for the net changes in employment.

= + + +

(1)

Where is the number of workers in manufacturing industry in year , is the natural

logarithm, the are industry fixed effects, the coefficient describes the effect of
independent variables on dependent variable, are year effects, is the error term that
measures stochastic changes in employment, is the import penetration ratio to the
industrys year that is measured as:

15

100%
+

Where is the shipment of the industrys year, is imports of the

industrys year
To check the robustness of estimation, I will take import share as independent variable
= + + +

(2)

is the import share of the industrys year that is measured as:

=

100%

As industries change in size and scale, the disturbance terms and are included as
zero mean with constant, homoscedastic variances. Equation will be estimated assuming that
the explanatory variable is orthogonal with disturbance terms, for all industries and time
periods.
Given this assumption, and assumptions about error terms, this equation can be directly
estimated using by ordinary least squares (OLS), and be used to figure out change in
employment relative to the import share in domestic output.
The most classical and general technique Ordinary Least Squares is used to minimize the
sum of squared vertical distances between the data set. Efficiency, unbiasedness, and
consistency are identical properties of OLS.
The effect of independent variables on dependent variable is described by coefficient
estimates and expected as negative sign. The negative sign of the coefficient estimate shows
that the increase in the explanatory variable is correlated with a decrease in dependent
variable.
Relationship between independent and dependent variables whether it is significant or
insignificant is measured by the P-value. For example, we use 1 % significance level. The
independent variable has an insignificant effect on dependent variable, when P value is
greater than 0.01. Conversely, if P-value is less than 0.01, relationship is significant.
Model is estimated using Stata/IC 12.1. All the regressions use the fixed-effect (FE) model
with robust command to calculate heteroscedasticity robust standard errors.
16

It seems reasonable to assume that the disturbance term will be uncorrelated with the
independent variable. If the explanatory variable is correlated with any of the components of
the error term, OLS estimation will be biased and inconsistent parameter estimates of the
model.

17

Section4. Results
The results of regressions for model 1 are presented in table 6, the results of regressions for
model 2 are represented in table 7 and table 8 checks the robustness of the result in table 7.
The imports competition coefficient yields estimate with a negative sign, as predicted in HO-S theorem.. The coefficient estimates in table 7 and 8 are relatively robust to variable
changes in table 6.
Table 6 reports Ordinary Least Squares (OLS) estimates from equation (1) over the
observed period. Coefficient estimates indicate the change in the log of industry employment
relative to import penetration ratio. Because of a large number of workers in manufacturing
sectors, I used the logarithm to reduce the importance of outliers. While the employment is
described by workers number, import penetration ratio that is calculated by dividing industry
imports by the sum of industry output plus imports is given in percentage. Years are included
as dummy variables to represent the difference in the intercept of the regression. Industry
fixed effects are not included.
Turning to import penetration ratio presented in panel (a) of table 6, we find that the
employment decline is associated with a rise in import penetration ratio. Using the estimated
coefficients column for changes in import, there is negative and significant effect between
import penetration ratio and employment at a 1 % level. Increase in import penetration by 1%
point is associated with approximately 0.017 log point decrease (approximately 1.7%) in
employment. This result reveals that, responsiveness of employment to changes in import is
very strong.
The estimates in panel (b) of table 6 indicate the result for import penetration ratio measure
in an industry fixed-effects framework. The dependent variable is employment given by the
number of workers in logs. Besides import penetration ratio, the determinants of industry
manufacturing employment include industry and year fixed effects. Using the industry fixed
effects intercepts vary over the cross-industry units. It is appropriate estimates when it is used
to analyse the direct relationship between increasing competition and industry employment.
Within industries, rising import penetration ratio is associated with a decline in U.S.
manufacturing employment. It is clear from the panel (b) of table 6 that the explanatory
variable has statistically significant influence on employment at 1% level, even if the
equation (1) controls time-invariant industry effects. The point estimate of the elasticity of
18

employment with respect to import penetration ratio is -0.011. From the estimates in
coefficients column, as predicted, with the fixed-effects estimates, a 1% point increase in the
level of import penetration reduces employment by 1.1% point which is quite large. It means
that approximately 6.9% decrease in manufacturing employment 2 is associated 6.3% increase
in import penetration ratio.
Panel (a) and (b) of table 6 suggest similar conclusion. The main finding is that import
competition has had strong and significant effect on employment within six-digit
manufacturing industry between 2002 and 2011.
The result of strong significant employment changes are consistent with some previous
studies (Kletzer 2002, for example), but contrasts with Grossman (1987), Mann (1988),
Campa and Goldberg (2001) and Dekle (1998) who found negligible effect of imports on
manufacturing employment.
To check the robustness of the results, this paper also estimates the alternative specification
which includes import share which is calculated as imports divided by industry output. Panel
(a) of table 7 present the coefficient estimates from OLS regression using the change in the
log of industry employment as the dependent variable, import share and time fixed effects as
the independent variables from equation (2). This set of estimates suggests that with these
equal estimated elasticities, a 1% point increase in import due to domestic output is
statistically associated very less decrease in employment at 1 % level significance.
Panel (b) of table 7 presents the results of estimating the employment equations with
industry fixed effects and time-period dummies. As indicated in panel (b) of table 7, with
controls of industry effects included in the equation (2), the estimated effect of import share
on employment is significantly negative at accepted levels. Furthermore, the estimated
employment elasticity in panel (b) of table 7 is substantially smaller than that coefficient
shown in panel (a) table 7.
Although the coefficients in table 7 indicates that, a 1% point increase in import due to
domestic output is statistically associated very less decrease in employment at 1 % level

Total change in manufacturing employment relative to import penetration ratio = total change in import
penetration ratio (table2) x coefficient estimate of import penetration ratio (table 6) x 100%. Numerically,
6,3344 * 0.011 * 100% = 6,947917%

19

significance, 2.6% decline in U.S. manufacturing employment3 is correlated with increasing

import share in domestic production over the ten years period.
In panel (b) of both table 6 and 7, as with industry and year fixed effects estimates, the
estimated responsiveness of employment to changes in import competition is somewhat
smaller than it in the panel (a) in both table 6 and 7. It means that adding other time-invariant
variables (industry fixed-effect estimates) significantly decreases the sensitivity of industry
employment to import competition since any heterogeneity in trend growth rates across
industries are not allowed by these restricted specifications.
To check the robustness of results in table 7, equation (2) estimates the relationship
between manufacturing employment and import share in manufacturing industries dropping
outliers in table 8. The general results are same that the effect of import share on
manufacturing employment is negative and statistically significant at 1% level. Although the
coefficients of table 8 are smaller than it in table 7, but it concluded that, increasing import
share caused approximately 2.3% decline in U.S. manufacturing employment 4 which is close
to the result in table 7.
The basic regressions yield similar results. These results indicate a likely relationship
between increased import competition- as a reflected in both increasing import share and
import penetration ratio is associated with a decline in US manufacturing employment during
the 10 years period meaning that import competition in U.S. manufacturing are substantial.
This observation of import competition shows consistency with some previous evidence on
U.S. manufacturing employment

Total change in manufacturing employment relative to import share = total change in import share (table 1) x
import share coefficient (table 7) x 100%. Numerically, 77,98*0.00034*100% = 2,64132 %
4
Total change in manufacturing employment relative to import share= total change in import share (table 5) x
import share coefficient (table8) x 100%. Numerically, 5,6* 0,00404* 100% = 2,26632%

20

Section5. Conclusion
This paper estimated to what extent changes in employment have been associated with
changes in imports, controlling for other factors that also affect production employment and
focusing on the period of 2002-2011 in 360 six-digit digit NAICS (North American Industry
Classification System) code U.S. manufacturing industries. A brief overview of this analysis
suggests the need to assess the substantial changes within industries when the impact of
competitive

pressure

from

imports

on

U.S.

manufacturing

employment

is

investigated. Shortage of data, I only used modest and descriptive model to estimate the
effect of import competition on the United States manufacturing industries, due to the
limitation of time length.
With respect to industry employment, there is a group of manufacturing industries facing
import competition those with rising import share and a decline in employment. I assembled
360 manufacturing industries dataset with industry level imports data from Census 2000 EEO
Data Tool, U.S. Census and industry level shipment data from Census of Manufactures, The
Annual Survey of Manufactures, and the Manufactures Shipments, Inventories and Orders
(M3) survey. Analysis relies on fixed effect estimation strategy to control for potential
industrial specific effects that are time-invariant and year fixed effects. As independent
variable, model (1) included import penetration ratio that is measured by total imports
divided by industry shipment plus import to estimate the relationship between import
competition and U.S. manufacturing employment. In the model (2) import competition is
measured as an import share that is equal to total imports divided by the domestic industry
output.
This paper suggests that rising import competition- as a reflected 6.3% increase in import
penetration ratio is associated about 6.9% decline in employment of U.S. manufacturing
industry between 2002 and 2011. While this result is consistent with some earlier studies, for
example, Kletzer (2002) who found also strong and negative correlation between imports and
industry employment, but it contrasts to Grossman (1987), Mann (1988), Campa and
Goldberg (2001) and Dekle (1998) who found a small effect of import competition on
manufacturing employment.

21

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24

Tables
Table1. Mean changes of imports in domestic production as a percentage: between 2002
and 2011

Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total

Mean
57.15057
61.77407
70.99618
76.13967
83.88598
96.34347
101.0883
110.1252
129.7309
135.1308
92.23651

Table2. Mean changes in Import penetration ratio in U.S. manufacturing industry in

percentage: between 2002 and 2011

Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Mean
22.25441
23.36268
24.99426
25.63343
26.53224
26.67256
27.25177
26.43224
27.8156
28.58888

25

Table3. Average domestic production by U.S. manufacturing industries in million

dollars: between 2002 and 2011

Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total

Industry
shipment
8164.994
8277.578
8810.308
9500.031
10019.78
10641.36
10713.89
9016.153
9759.736
10589.98
9549.381

Table4. Changes in average number of U.S. manufacturing workers: between 2002 and
2011
Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Average number of industry

workers (in numbers)
30827.19
30196.13
29511.78
29193.67
29135.82
28445.01
28022.06
24942.01
23221.6
23458.18

26

Table5. Mean changes in import share in U.S. manufacturing industry in which import
share is higher than 100 in percentage: between 2002 and 2011

Year
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Mean
23.37792
24.96261
27.39571
27.65968
28.11736
26.97294
28.37218
26.93372
28.96162
28.98763

27

Table6. Changes in Employment, and Import Penetration ratio: Within U.S.

manufacturing industries estimates, 2002-2011

(a)
Log of employment

Import penetration ratio

-0.0169***

(0.00151)

10.20***

10.07***

(0.0553)

Year fixed effect

Industry fixed effect

log of employment

-0.0110***

(0.000753)
Constant

(b)

(0.0379)

Yes

Yes

No

Yes

3600

3600

R-sq

0.135

0.976

adj. R-sq

0.133

0.973

rmse

1.011

0.179

-------------------------------------------Regression with OLS with robust variance estimates. Robust standard errors in parentheses

All the regressions use the fixed-effect (FE) model. The import penetration ratio is measured
in percentage.
* p<0.05, ** p<0.01, *** p<0.001

28

TABLE7. Changes in Employment, and Import share: Within U.S. manufacturing

industries estimates, 2002-2011

(1)

(2)

Log of employment
Import share

-0.000892***
(0.0000851)

Constant

log of employment
-0.000340***
(0.0000661)

9.879***

9.847***

(0.0528)

(0.0142)

Year fixed effect

Yes

Yes

Industry fixed effect

No

Yes

3600

3600

R-sq

0.088

0.976

adj. R-sq

0.086

rmse

0.973

1.038

0.179

Regression with OLS with robust variance estimates. Robust standard errors in parentheses

All the regressions use the fixed-effect (FE) model. The import share is measured in
percentage
* p<0.05, ** p<0.01, *** p<0.001

29

Table8. Changes in Employment, and Import share: Within U.S. manufacturing industries
estimates, 2002-2011

(1)

(2)

Log of employment
Import share

-0.00524***
(0.000683)

Constant

log of employment
-0.00404***
(0.000547)

10.05***

10.01***

(0.0582)

(0.0175)

Year fixed effect

Yes

Yes

Industry fixed effect

No

Yes

3100

3100

R-sq

0.025

0.981

adj. R-sq

0.022

0.979

rmse

1.006

0.147

Regression with OLS with robust variance estimates. Robust standard errors in parentheses
All the regressions use the fixed-effect (FE) model. The import share is measured in percentage
* p<0.05, ** p<0.01, *** p<0.001

30

Table 9. Descriptive statistics of employment, import

penetration ratio, and import share
Variables

Observation

Mean

Std. Dev.

Employment

3600 27695.35

36298.75

MP ratio

3600

25.95381

MS ratio

3600

92.23651

Min
230

Max

Skewness

Kurtosis

460386

4.734518

41.37698

22.57248 .0001336

98.40694

1.159913

3.865463

335.9598 .0001336

6177.237

9.967051

31

127.1177