NAFTA and Employment: Has It Mattered? Gerald Schluter and Fred Gale

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1 NAFTA and Employment: Has It Mattered? Gerald Schluter and Fred Gale Introduction Most appraisals of the impacts of NAFTA agree that the dramatic short-run effects predicted by both supporters and opponents were greatly exaggerated (see, for example, Bluestein). The giant sucking sound of U.S. jobs going to Mexico did not materialize, but neither did the cornucopia of export jobs predicted by some supporters. Instead, the effects on the U.S. economy have been modest. Economists generally agree that the effects of free trade agreements are long-term and often occur in subtle ways around the edges of the economy, hence, the short-term macroeconomic impacts of NAFTA are difficult to evaluate. Still, there is considerable interest in arriving at an assessment of NAFTA impacts, since it has served as a lightning rod for political debate in the 1990's. In this paper we use available data to gauge the short-term impacts of NAFTA agricultural trade on United States employment, with particular attention to the rural economy. Our estimates are produced using input-output analysis to show the employment directly supported in farming and food processing industries as well as the indirect employment in supporting manufacturing industries, trade, transportation, and services. 1 1 At the time of writing, we did not have nonagricultural trade data in the proper sector classification to conduct the input-output analysis. In a future version of this paper, we hope to extend the analysis to estimate impacts of all NAFTA trade on metro and nonmetro employment. 1

2 The Economic Environment The first consideration in evaluating NAFTA is the sheer size of the U.S. economy compared with that of its neighbors. The United States, with a civilian work force of 121 million has nearly three times as many workers as Mexico (28.7 mil) and Canada (14.9 mil) combined, and its $7 trillion GDP is nearly ten times that of its NAFTA neighbors. Changes in the U.S. economy are likely to impact Canada and Mexico more than the reverse. NAFTA trade is important to all three nations, but is not a dominant influence in the U.S. economy. United States exports to Canada and Mexico of about $170 billion in 1995 amounts to about 2 percent of its $7 trillion economy. Also, NAFTA is only one of the countless factors affecting employment in the United States economy, which is characterized by considerable churning of jobs between sectors and from one firm to another as the economy adjusts to changes in consumer demand, demographics, relative prices and wages, technology, taxes and regulations. From December 1993 to July 1996 the U.S. economy added over 6.3 million jobs, of which jobs created by NAFTA would be a tiny share, even if optimistic predictions of 200,000 NAFTA jobs were accurate. NAFTA trade itself is subject to a number of influences besides the lowering of trade barriers, most notably the Mexican peso crisis in NAFTA s second year which caused a large deterioration in the United States trade balance with Mexico. Methodology and Sources of Data We employ input-output (I/O) analysis that has been used previously to analyze income and 2

3 employment generation in the food and fiber system (Edmondson, Petrulis, and Somwaru; Lee and others) and agricultural trade effects on the national economy (Edmondson, 1994; Harrington, Schluter, and O'Brien, 1986). For this analysis, we use the 1987 U.S. I/O table, which is the latest available (Bureau of Economic Analysis). The I/O table can be used to estimate the output, income, and employment requirements in various supporting sectors to accommodate various levels of final demand for goods produced in the economy. The output of the U.S. economy is summarized by a vector, X, where each row represents on of the 524 sectors included in the Bureau of Economic Analysis I/O table. Output is determined by the equation, X (I A) 1 F, (1) -1 where (I-A) is a I/O total requirements matrix, and F is a vector of agricultural exports or imports by sector. The elements of F are the annual dollar value of agricultural trade reported in USDA trade statistics (USDA/ERS). Agricultural products include both bulk commodities and processed foods, such as meat products, juices, vegetable oils and grain products. Price deflators are used to compute constant dollar measure of agricultural trade in base year (1987) prices. Under an I/O structure, employment is a fixed proportion of output, so employment requirements by sector, E, to produce the demand F, can be computed as: 3

4 E L (I A) 1 F, (2) where L is a diagonal matrix of civilian employment coefficients per dollar of sector output derived from Bureau of Labor Statistics data. Employment coefficients are adjusted for farm and nonfarm labor productivity changes using productivity indices from Bureau of Labor Statistics. After obtaining estimates from (2), we aggregate the 524 sectors to seven categories: Livestock, Grains and Oilseeds, Other Crops, Food Processing, Other Manufacturing, Transportation and Trade Services, and All Other, for ease of presentation. The resulting employment estimates include jobs directly involved in producing exported commodities as well as indirect employment in supplier industries that support production of the commodity. We also measure employment that would be required to support the value of 2 imports from NAFTA countries if they were produced in the United States. Employment Impacts In 1993, prior to NAFTA, we estimate that agricultural exports to Canada and Mexico combined supported 204,700 jobs in the United States. Agricultural imports from those countries in 1993 would have supported 169,500 jobs if produced in the United States. About 60 percent of these jobs (both export and import) were attributed to trade with Canada, and 40 2 Estimates in this presentation are compiled from analyses supporting the ERS NAFTA Monitoring Taskforce. As such, the estimates have benefited from the normal learning curve of refinement of data availability/utilization, refinement of underlying and supporting economic models, and the normal interaction of analysts preparing and delivering reports. A normal tradeoff of this learning curve is a lessened degree of comparability between estimates. Our approach allows stronger comparison of our estimates within a year than between years. 4

5 percent to trade with Mexico. The estimates by sector illustrate that the impact of agricultural trade extends far beyond the farm sector. Of the 204,700 agricultural export jobs, about 40 percent were on farms, another 40 percent in trade, transportation and services, and the remaining 20 percent in food processing and other manufacturing. Import employment was slightly more concentrated in farming, with 45 percent of import jobs, while trade and services were 38 percent, and food processing and manufacturing 17 percent. The impacts also extend beyond the rural economy, as a large share of these jobs are in metropolitan areas. We used 1993 employment shares by industry from the Census Bureau s County Business Patterns database to estimate the metro and nonmetro components of NAFTA export jobs. The results show that nearly 70 percent of jobs are in metro areas, and only 30 percent in nonmetro. The share for Canadian exports is somewhat higher (72 percent metro) than the metro share of Mexican export jobs (66 percent), reflecting the tendency to sell more processed goods to Canada. Trade in other farm, which is composed mostly of fruit, vegetables, and tree nuts, generates more employment than livestock, grains and oilseeds. Most of this trade moves northward, as exports to Canada generate 34,500 U.S. jobs, while imports from Mexico to the U.S. account for the equivalent of 26,500 U.S. jobs. From 1993 to 1994, NAFTA agricultural export jobs rose by 20,800, while import jobs 5

6 increased by 15,000, for a small net gain of 4,200 (table 2). All of the gains were in nonfarm industries, as apparently NAFTA exports have stronger interindustry linkages than imports. The largest gains in export jobs were in trade and transportation and other services. Unfortunately, our estimates for 1993/94 are not comparable to estimates for 1995/96, because the earlier estimates were produced with the 1982 I/O table, and the later estimates used the newly-available 1987 table. Estimates using the 1987 tend to produce lower employment estimates for a given value of final demand. Therefore, we omit the change in employment from table 3, and show only the and changes. This is unfortunate, since we cannot capture the large 1995 changes due to the Mexican peso crisis. Between 1995 and 1996, NAFTA export jobs rose at a more vigorous pace of 31,800. The net gain in jobs of 9,300 was also greater than during , as import jobs rose by 21,100. Gains were registered in Livestock, Grain and Oilseeds, and Other Services. Other observations include the following: Agricultural trade patterns and, therefore, agricultural trade-related employment, are less variable with Canada than with Mexico. The U.S. Canada Free Trade Agreement predated NAFTA by several years, whereas 1994 was the first year of changed trade rules for Mexico under NAFTA. The number of livestock workers needed for United States exports to Canada and 6

7 Mexico are remarkably similar. The number of fewer livestock workers needed because of United States imports from Canada is almost double those needed for United States agricultural exports to Canada. Co-incidently, the number of meat and poultry processing workers needed for United States exports to Canada and Mexico are remarkably similar. The number of fewer meat and poultry processing workers needed because of United States imports from Canada is about the same as those needed for United States agricultural exports to Canada. Choosing the change in employment as a measure of the effect of NAFTA on the United States economy may give a less favorable view of NAFTA. NAFTA trade fits the overall pattern of U.S. agricultural trade noted by Lee, Wills, and Schluter, i.e., the U.S. exports capital intensive commodities, e.g. grains and oilseeds, and imports labor intensive commodities, e.g. vegetables and fruits. Discussion The results reported here suggest that the impact of NAFTA agricultural trade on the U.S. economy is modest. Inflation-adjusted changes in trade were rather small, and gains in export volume were offset by increased productivity in many sectors. The result is little net impact on employment. Impacts are spread widely across various sectors of the economy, and most of the impact is beyond the farm gate in industries that are largely urbanized. Much of the 7

8 variability of the employment effects of NAFTA-related agricultural trade comes from changes in fruits, tree nuts, and vegetable trade. These are strictly demand driven estimates. The input-output model uses a base-year snapshot of the interrelations between sectors of the economy to estimate the interrelated input demands between sectors. It then uses these interrelatedness measures to estimate levels of supporting economic activity and employment needed to support NAFTA exports or to estimate domestic job equivalent of NAFTA imports. The model only considers employment adjustments resulting from changes in demand due to exports and imports. It assumes the adjustments are unimpeded. And the time horizon is a year or so. It is instructive to contrast these results with those from another class of models, Computable General Equilibrium (CGE) models, which assume full-employment is always achieved. CGE models compare static equilibrium conditions between two situations, e.g. pre-nafta and NAFTA. With this approach, the net employment effect is zero, but structural adjustments occur in labor markets as the economy adjusts to the NAFTA trade environment. The sum of the absolute value of these labor movements provides an indication of the structural adjustment required because of NAFTA. The full employment assumption can be modified by some combination of labor supply function from the domestic population or migration function either within NAFTA or within the world. This class of models are longer term models, but considering them puts I/O estimates into better perspective. 8

9 Another source of error in the I/O method of estimation is its assumption that firms affected by NAFTA have average productivity levels. In fact, companies that increase exports are likely to have above average productivity, and, hence, relatively few workers per dollar of 3 exports. This method also is unable to incorporate the possibility that gains and losses due to NAFTA may be geographically concentrated in, say, border states or regions that are more or less competitive than average. The I/O analysis does not tell how much of trade changes with Canada and Mexico represent trade diverted from other regions. For example, an increase in apparel imports from Mexico may be replacing imports from Pacific rim countries, rather than domestic production. This possibility clearly suggests that the method may overstate trade impacts on the economy. The NAFTA agreement went into effect as the U.S. economy was emerging from early 1990's sluggishness in the economy. Determining the impact of NAFTA trade on the already growing economy may be like determining the effect on water depth of a steam flowing into a bay under a rising tide - the effects are additive but not easily discernible (although preferable to the first years of the U.S.-Canada Free Trade Agreement when the sluggish economy led to weak trade.) 3 See Bernard and Jensen, who show that exporting establishments are larger, more productive, and pay higher wages than other manufacturers. 9

10 Table 1. Selected United States Macroeconomic Statistics, unit GDP bil 92 $ 6,386 6,609 6,743 6,895 Employment million in Manufacturing million Exports billion $ to Canada & Mex billion $ Imports billion $ from Can & Mex billion $ Ag. Exports to Canada billion $ to Mexico billion $ Ag. Imports from Canada billion $ from Mexico billion $ Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Bureau of the Census, USDA Foreign Agricultural Trade of the United States. 2 August Annualized estimate based on January-June total for

11 Table 2. Sectoral Employment Embodied in Exports and Imports to/from NAFTA Nations, 1993 Exports to: Imports from: Sector Canada Mexico NAFTA Canada Mexico NAFTA ,000 jobs ,000 jobs Total Livestock Grains-Oilseeds Other Farm Commodities Food Processing Other manufacturing Trade and Transport Other Services Estimates produced using input-output analysis based on census bureau foreign trade statistics for agricultural products in Totals may not add due to rounding. Table 3. Growth in Employment Attributed to Exports and Imports to/from NAFTA Nations, Exports to NAFTA Imports from NAFTA Sector ,000 jobs 1,000 jobs Total Livestock Grains-Oilseeds Other Farm Commodities Food Processing Other manufacturing Trade and Transport Other Services Estimates produced using input-output analysis based on census bureau foreign trade statistics for agricultural products in 1993 and 1994 and 1995 and Increases in imports are associated with negative employment growth. 11

12 References Bernard, A.B., and JB Jensen. Exporters, Jobs, and Wages in U.S. Manufacturing: Brookings Papers on Economic Activity: Microeconomics Bluestein, Paul. That Giant Sucking Sound Was Neither Here nor There. Washington Post, March 7, 1996, p. D1. Bureau of Economic Analysis. Benchmark Input-Output Accounts of The United States, Nov Cochrane, Willard W. The Development of American Agriculture: A Historical Analysis. University of Minnesota Press, Minneapolis, Edmondson, William. "U.S. Agricultural Trade Boosts Overall Economy." USDA, ERS, FATUS, Sept./Oct. 1995, pp Edmondson, William, Chinkook Lee, Gerald Schluter, and Lowell Dyson. Estimating Agricultural Trade-Related Rural Employment in the 1990's." Selected Paper Presented at the American Agricultural Economics Association Meetings, San Antonio Texas, July 28-31, Edmondson, William, Mindy Petrulis, and Agapi Somwaru. Measuring the Economywide Effect of the Farm Sector: Two Methods. USDA, ERS, Technical Bulletin #1843, July, Harrington, David H., Gerald Schluter, and Patrick O'Brien. Agriculture's Links to the National Economy. AIB-504, USDA,ERS, Oct Lee, Chinkook, William Edmondson, and Lowell Dyson. Agricultural Exports and the Rural Economy in the 1990's." Rural Conditions and Trends. Vol. 7, No. 1, pp 22-26, July, Lee, Chinkook and Gerald Schluter, "Growth and Structural Change in U.S., Food and Fiber Industries, : An Input-Output Perspective. AJAE. Vol. 75, Aug., 1993, pp Lee, Chinkook, Gerald Schluter, William Edmondson, and Darryl Wills. Measuring the Size of the U.S. Food and Fiber System. USDA/ERS/AER #566, March, Lee, Chinkook, Darryl Wills, and Gerald Schluter. "Examining the Leontief Paradox in U.S. Agricultural Trade." Agricultural Economics, The Journal of the International Association of Agricultural Economists. Vol. 2, 1988, pp USDA, ERS. Foreign Agricultural Trade of the United States (FATUS). Selected issues. 12

13 USDA, ERS. NAFTA: An Early Assessment. NAFTA-2, December, USDA, ERS. Rural Conditions and Trends. Various issues. USDA, ERS. Rural Economic Development in the 1980's: Preparing for the Future. July, U.S. Dept. Labor, Bureau of Labor Statistics. Employment and Employment Earnings. various issues. 13

A Procedure For Determining Food and Fiber Output, Employment, and Value-added by Agricultural Sector

A Procedure For Determining Food and Fiber Output, Employment, and Value-added by Agricultural Sector by William Edmondson Economist, FRED, Economic Research Service and Gerald Schluter Agricultural Economist,