United States production technology and the effects of imports on employment

This study examines empirically the net aggregate employment effect of imports in the U.S. economy. Unlike the majority of the studies in this area that estimate only the factor displacement effect in the import competing industries, this study employs a cost function approach, utilizing alternative formulations of the Transcendental Logarithmic and the Normalized Quadratic flexible functional forms, that is capable of capturing the employment generating cross-industry effects of imports. These employment generating effects arise because of downstream processing which pertains to all imports, including final goods, since they also are subject to domestic handling before they are put on the shelf. Hence, a substantial portion of their final price reflects value added domestically.; Import disaggregation schemes by kind or by origin provide estimates pertaining to the employment effects of nonuniform protection of domestic industries and preferential treatments of foreign trade partners respectively. Labor disaggregation based on alternative definitions of skill facilitate the identification of possible asymmetries in the effects of specific imports on groups of labor distinguished by their skill content.; The results of this study strongly support our main conjecture: the downstream positive employment effects of imports are significant. This is by the fact that imports of those goods which enter the domestic production at an early stage and which are highly complementary with labor in later stages of the production process actually increase overall employment. Specifically, we find that imports of capital goods and consumer nondurables (when imports are disaggregated by kind) and imports from developing countries (when imports are disaggregated by origin) are complements with aggregate domestic employment. The major beneficiaries are found to be low skill workers. These results are diametrically opposite with the predictions of traditional trade theory which ignores altogether downstream processing since it considers all traded goods as final.