The Canada-US Free Trade Agreement (CUSFTA) came into effect on 1 January 1989 and changed the competitive landscape of Canada. A new study of how Canadian workers fared in the years following the bilateral agreement shows that, while there were job losses in the short-term, workers went on to recover those losses relatively quickly as export opportunities appeared.
Published in The Review of Economic Studies, the study The Long-Run Labour Market Effects of the Canada-U.S. Free Trade Agreement was conducted by Associate Professor Peter Morrow of the Department of Economics at the University of Toronto and his co-author Professor Brian Kovak of Carnegie Mellon University.
Morrow and Kovak used a novel and confidential Statistics Canada dataset that enabled the team to track individual worker’s earnings from each employer between 1984 and 2004.
“We took workers who were employed in 1988, on the eve of CUSFTA, and followed them over time as the tariff cuts went into effect,” Morrow explained. “The prevailing conventional wisdom about tariff reduction and labour market effects comes from studies of the China shock, and that literature persistently finds that import competition from China is bad for workers and things stay bad for a long time. That is not what we find here.”
Under the agreement, Canadian tariff cuts and eliminations did lead to an increased likelihood of layoffs and reduced earnings for workers at the employers they were with when the changes came into effect, but those losses were short term. Morrow and Kovak found that Canadian workers recovered those lost earnings over time by moving into other firms, industries, and sectors. The researchers also found that Canadian tariff cuts did not reduce the total number of years worked, or workers’ cumulative earnings during the 16 years following enactment of the agreement.
“The tariff cuts did have the expected effects,” Morrow said, “but Canadian workers’ adjustment to changing labour demands was relatively speedy and successful.”
A simple explanation for why or how Canadian workers made the transition so successfully is elusive.
“There’s no smoking gun,” Morrow explained. “Whether it’s the education system, or the portability of health benefits, or of retirement funds through the CPP, we just don’t know. We do know that when workers left industries that faced increased competition, there were other expanding industries for them to move into. There were places to go.”
However, the bilateral nature of the agreement did play an important role.
“Canadian workers left affected industries quickly and transitioned to other manufacturing industries, construction, and services, and the bilateral nature of the FTA gave import-competing workers employment options in potential alternative manufacturing industries benefiting from larger U.S. tariff cuts,” Morrow said.
The results suggest that the success of labour market transitions applied both to older workers, who were highly attached to the labour force and specific employers in the period before the trade agreement, and to workers with lower attachment, such as young workers and women, who move jobs more often.
“Even low attachment workers moved easily into new industries,” Morrow said. “It really was a case of short-term pain offset by long term gain.”
For Morrow, the results reveal key attitudes that should govern policy discussions surrounding trade agreements.
“Don’t fear trade,” he said. “We should not be afraid of engaging in international trade because it creates new opportunities and workers can and do take those opportunities.”