International Dimensions of Manufacturing

Jeffrey R. Campbell

Federal Reserve Bank of Chicago and NBER

Employment Consequences of an “Overvalued” Dollar

• American consumers’ substitution towards cheap imported goods reduces employment in U.S. manufacturing industries.• Import assembled cars. (Knetter)• Bring the car here one piece at a time (Pali)

• Imported materials become cheaper, increasing employment in downstream industries.

• With PTM, U.S. exporters raise their ¥ prices, perhaps lower their $ prices, and cut production.

• In competitive markets, exporters lower their $ prices and cut production.

ANDY BOB CHARLIE

1 2 3Jobs/Airplanes

$15

$10

$5

World Price, $15

0

Quantity Supplied, 3

Supply Curve

ANDY BOB CHARLIE

(Lost Job)

1 2 3Jobs/Airplanes

$15

$10

$5

World Price, $10

0

Quantity Supplied, 2

XENA YVONNE

(Unemployed)

ZELDA

(Unemployed)

1 2 3Flights/Jobs

World Price, $15

$5

$10

$15

Quantity Demanded, 1

Demand Curve

XENA YVONNE

(New Job)

ZELDA

(Unemployed)

1 2 3Flights/Jobs

World Price, $10

$5

$10

$15

Quantity Demanded, 2

Summary

• Quantity demanded increases from 1 to 2.• Quantity supplied decreases from 3 to 2.• Net exports fall from 2 to 0.• Andy and Bob (Low cost suppliers) lose. ($10)• Charlie (High cost supplier, Lost job) does not lose.• Xena (High value demander) wins ($5)• Yvonne (New job) does not gain.• Manufacturing loses one job and Services gain

one job.• U.S. cost of the foreign devaluation, $5.

Conclusions

• Bivens’ procedure overstates the trade deficit’s effects on employment.

• Jobs are a poor measure of economic well-being.• The devaluation costs job losers (Charlie) less than survivors (Andy, Bob).• The devaluation benefits the newly employed (Yvonne) less than the

previously employed (Xena).• No change in total employment.• Net cost of foreign devaluation, $5.

• What is to be done?• Jawbone the exchange rate up. (Effective only if the dollar is truly overvalued)• Lower legacy costs. (Ineffective.)• Tax service producers to subsidize exports. (Makes a bad situation worse)• Take it on the chin and move on.