Proposed U.S.-South Korea Free Trade
Agreement and Potential Employment Effects:
Analysis of Studies
Mary Jane Bolle
Specialist in International Trade and Finance
James K. Jackson
Specialist in International Trade and Finance
February 28, 2011
Congressional Research Service
7-5700
www.crs.gov
R41660
CRS Report for Congress
P
repared for Members and Committees of Congress

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Proposed U.S.-South Korea Free Trade Agreement and Potential Employment Effects

Summary
The Obama Administration finalized negotiations with South Korea in early December 2010 on a
bilateral free trade agreement. As a result, the administration is expected to submit implementing
legislation to the 112th Congress on the proposed agreement, but to date has not indicated a
timeline for doing so. The 112th Congress may also be asked to consider implementing legislation
for proposed free trade agreements with Columbia and Panama. Congress not only plays a direct
role in approving legislation that implements the provisions of free trade agreements, but also
authorizes and appropriates funding for programs that are meant to provide special assistance to
firms and workers that are dislocated as a result of lower barriers to trade. Since the proposed
agreement covers a wide range of trade and investment issues, it could have substantial economic
implications for both the United States and South Korea. South Korea is the seventh-largest
trading partner of the United States, and the United States is South Korea’s third-largest trading
partner.
Similar to other trade agreements, the proposed U.S.-South Korea Free Trade Agreement
(KORUS-FTA) has attracted both supporters and detractors, primarily over the impact the
agreement could have on employment in the economy. Supporters argue that the agreement could
create as many as 280,000 jobs in the economy. Others, however, argue that the agreement could
lead to an overall loss of up to 159,000 jobs in various sectors of the economy. Still others
contend that the United States stands to lose exports, employment, and extended economic
opportunities if it fails to sign a trade agreement, while the European Union and other nations are
lining up to finalize similar agreements with South Korea.
Estimating the economic impact of trade agreements, however, is a daunting task, due to a lack of
data and important theoretical and practical matters associated with generating results from
economic models. In addition, such estimates provide an incomplete accounting of the total
economic effects of trade agreements. This report assesses the results of a number of models that
are being used to generate estimates of the effect of the KORUS FTA on employment. These
studies were chosen specifically because they estimate (or can be used to estimate) data on
employment effects of the trade agreement. All economic models incorporate various
assumptions that are necessary in order for the model to generate results. Invariably, these
approaches determine, to some extent, the results that are generated and, therefore, limit their
representation of the real world economy. Currently, the various models produce widely disparate
estimates of the number of jobs affected bay the trade agreement, reflecting the various methods
that are used in the models.
From the perspective of a large open economy such as the U.S. economy, international trade is
not a major determinate of total employment in the economy, real wages in the economy, or the
overall level of production. This is especially true for bilateral trade agreements with individual
countries where the impact on the economy as a whole is expected to be small. Nevertheless,
some sectors of the economy are likely to be affected more than others. Congress has
demonstrated an on-going interest in assessing the economic impact of trade agreements and, at
times, has provided assistance to those workers and firms that are disproportionately affected.

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Proposed U.S.-South Korea Free Trade Agreement and Potential Employment Effects

Contents
Introduction ................................................................................................................................ 1
Estimating Employment Effects of Trade Agreements ................................................................. 2
Trade and Employment in the U.S. Economy .............................................................................. 4
Jobs Gained and Lost for the Economy as a Whole................................................................ 5
Benefits and Costs of International Trade .................................................................................... 7
Benefits of Trade................................................................................................................... 7
Impact of Trade on the Composition of Employment in the Economy.............................. 7
Adjustment Costs of Trade .................................................................................................... 8
Issues Involved in Quantifying the Employment Effects of Trade .......................................... 8
Problems in Linking Changes in Production with Changes in Employment............................ 9
Estimates of Employment Effects of the KORUS FTA .............................................................. 11
The USITC Estimate........................................................................................................... 11
The University of Michigan Estimate .................................................................................. 11
Derivative Estimates ........................................................................................................... 13
Additional Estimates ........................................................................................................... 14
U.S.-Korea Business Council Estimate.......................................................................... 14
Economic Policy Institute Estimate ............................................................................... 14
Conclusion................................................................................................................................ 15

Tables
Table 1. Estimates on the Employment Effects of KORUS FTA .................................................. 3
Table 2. Jobs Gained and Lost Annually in the U.S. Economy
and Job Turnover Rate, 2006-2009........................................................................................... 6
Table 3. University of Michigan Estimate of Potential Sectoral Employment Effects of
the Korea-U.S. Free Trade Agreement .................................................................................... 12
Table B-1. Key Steps Involved in Converting Changes in Tariff Rates
into Changes in Employment ................................................................................................. 20

Appendixes
Appendix A. Employment Population and Shares of the Economy, by Major Industry and
Sector, 2010........................................................................................................................... 17
Appendix B. Standard Assumptions of Economic Models ......................................................... 18

Contacts
Author Contact Information ...................................................................................................... 20

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Proposed U.S.-South Korea Free Trade Agreement and Potential Employment Effects

Introduction
Congress plays a major role in formulating and implementing U.S. trade policy through its
Constitutional role in regulating foreign commerce. This role includes providing authority to the
President to conclude trade agreements to eliminate and reduce tariff and non-tariff barriers to
U.S. trade with other countries. For Members of Congress, trade can be a difficult issue, because
decisions that liberalize trade flows have mixed effects on U.S. domestic and foreign interests,
both economic and political. Historically, Congress has supported policies to open international
markets to U.S. goods, services, and agriculture. It also has weighed carefully the economic
impact of trade agreements to asses their benefits and costs. Congress also has enacted targeted
adjustment assistance programs to provide training and other assistance to help workers and firms
that may be dislocated by greater market opening adjust to new economic opportunities.
With likely congressional consideration of a proposed free trade agreement between the United
States and South Korea, a number of estimates are being offered to quantify the potential effects
on U.S. employment.1 This report will discuss the models that are used to estimate the
employment effects of the agreement and their various assumptions that are necessary in order for
the model to generate results. Invariably, these assumptions determine to some extent the results
that are generated and, therefore, limit their representation of the real world economy. The models
also are highly sensitive to the assumptions that are used to establish the parameters of the models
and are hampered by a lack of data in some areas.
In general, the various economic models provide differing estimates of the magnitude of changes
in U.S. employment that could arise from a trade agreement with South Korea. Both advocates
and opponents of the KORUS FTA cite results of these studies to support their position. Each of
these models has strengths and weaknesses and varies in the degree to which it reflects economic
reality. These models are discussed at greater length in the analyses that follow. In addition, the
potential job effects need to be viewed in terms of their relative share of U.S. employment.
Estimates from the studies range from as many as 280,000 jobs potentially gained to 159,000 jobs
potentially lost. Middle-range estimates include one often cited by the Obama Administration,
which suggests that the KORUS FTA would support 70,000 export jobs. At the other end of the
spectrum, other estimates suggest that the United States could lose 345,017 jobs if the United
States does not approve and implement the KORUS-FTA but the European Union (EU) and
Canada implement their FTAs with South Korea. None of these estimates represent more than
1.4% of total goods-producing employment.
None of these studies, however, draws a direct link between any expected changes in trade from a
change in tariffs to changes in employment. These estimates reflect different methodologies and
assumptions, and a partial accounting of the total economic effects of such agreements. For
instance, the proposed agreement includes provisions on trade in goods, services, and investment,
but current estimates focus only on changes in goods-producing employment. As a result, they do
not serve well as an indicator of the overall impact of the agreement on the economy. The
estimates selected for analysis are the following.

1 For additional information on the KORUS FTA, see CRS Report RL34330, The Proposed U.S.-South Korea Free
Trade Agreement (KORUS FTA): Provisions and Implications, coordinated by William H. Cooper and CRS Report
R41389, Pending U.S. and EU Free Trade Agreements with South Korea: Possible Implications for Automobile and
Other Manufacturing Industries, by Michaela D. Platzer.
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Proposed U.S.-South Korea Free Trade Agreement and Potential Employment Effects

• U.S. International Trade Commission (USITC): U.S-Korea Free Trade
Agreement Potential Economy-wide and Selected Sectoral Effects2
• The University of Michigan: Economic Effects of a Korea-U.S. Free Trade
Agreement3
• U.S.-Korea Business Council: Failure to Implement the U.S.-Korea Free Trade
Agreement: The Cost for American Workers and Companies4
• Economic Policy Institute (EPI): Trade Policy and Job Loss: U.S. Trade Deals
with Colombia and Korea Will be Costly5
In addition, two other estimates, derived from the USITC study and released by the Obama
Administration and the Majority Staff of the Senate Finance Committee Trade Subcommittee, are
reported.
Congress has demonstrated an on-going interest in concluding trade agreements to eliminate and
reduce barriers to U.S. trade in goods, services, and agriculture, and its has assumed a direct role
in assessing the impact of trade agreements on the U.S. economy. This report provides
background and context for the analyses of the various estimates. It summarizes congressional
interest in the issue and then examines the specific estimates—their findings, assumptions,
methodologies, and the limitations of those methodologies. Finally, it explains the broader
macroeconomic and microeconomic context in which the composition of employment within the
economy is affected by a new trade agreement.
Estimating Employment Effects of
Trade Agreements
Although discussions of trade agreements often focus on potential employment gains or losses,
most economists argue that such employment estimates represent a partial accounting of the total
economic effects of trade agreements and, therefore, do not perform well as an indicator of the
overall impact of the agreement on the economy. As this report attempts to explain, estimating
such employment effects is imprecise and highly sensitive to the assumptions that are used. In
addition, while trade agreements generally are comprehensive in nature and cover goods,
services, and investment, most employment estimates focus narrowly on the goods sector and do
not adequately represent the total impact of the agreements. Although it is difficult to estimate
precisely, employment effects associated with liberalizing trade in services and reducing or
eliminating barriers to investment flows potentially could be very large and positive, since the
United States is highly competitive in a number of services sectors and U.S. direct investment
abroad often spurs exports. Finally, estimates of employment, by themselves, do not account for a
broad range of benefits for the economy as a whole that can provide individual consumers and

2 USITC Publication 3949, September 2007. Seven chapters plus additional material.
3 Kozo Kiyota and Robert M. Stern, Research Seminar in International Economics, Discussion Paper No. 557, Gerald
R. Ford School of Public Policy, April, 2007.
4 Laura M. Baughman and Joseph F. Francois, November, 2009. The U.S.-Korea Business Council is affiliated with the
U.S. Chamber of Commerce, 4 p.
5 Robert E. Scott, February 25, 2010, 13 p.
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firms with large economic benefits and yield broad productivity and efficiency gains for the
economy over the long run that may well enhance employment.
Since the KORUS FTA was signed in 2007, a number of estimates of the potential effects of the
KORUS FTA have been released that either estimate directly, or have been used to estimate, the
effect of the proposed trade agreement on U.S. employment. The estimates range from 280,000
jobs gained to a loss of 159,000 jobs if the United States does adopt the agreement. Two of the
estimates are based on standard economic modeling, two are derivative estimates based on the
USITC estimates, and two represent studies based on other types of calculations. Table 1 below
summarizes all six estimates. These estimates will be discussed in greater detail below. The two
standard model estimates were undertaken by the USITC and the University of Michigan. Neither
of these efforts estimated the total number of U.S. jobs created or lost by the KORUS FTA.6 but
focused instead on potential economy-wide trade effects and sectoral shares of those effects. In
contrast, the two non-standard approaches by the U.S.-Korea Business Council and the Economic
Policy Institute, did not attempt to estimate employment effects of the KORUS FTA directly
based on projected changes in trade between South Korea and the United States, but used U.S.
trade with other countries and other trade agreements as proxies.


Table 1. Estimates on the Employment Effects of KORUS FTA
Estimated Trade or Employment
Gain or Loss over Total
Implementation Period
Employment Estimate in
Study/Estimate
(about 10 years)
Perspective
USITC: U.S.-Korea Free Trade
No estimate. Study assumed ful
No employment estimates were
Agreement Potential Economy-Wide and
employment, so it projected only share
made.
Selected Sectoral Effects, 2007 (for the
shifts among goods-producing industries.
goods sector only).
Study estimates net export gains of
$3.3-$4.0 billion in the goods-producing
sectors.
University of Michigan: Economic
Like the USITC study, this study
85% of the projected job gains
Effects of a Korea-U.S. Free Trade
assumes full employment and therefore
are in agricultural industries;
Agreement, 2007 (for the goods and
estimates share shifts among industries.
90% of the projected job losses
services sector).
However, it also includes jobs data by
are in six industry sectors:
industry for 2006, so it applies estimated government services, trade and
share changes to actual jobs data, to
transportation services, and
estimate job gains and losses by industry. manufacturing production for
In addition, this study covers services as
textiles, apparel, transportation
well as goods.
equipment, and metal products.
The White House: Remarks by the
Estimates, based on USITC projections
This estimate is equal to 0.4% of
President at the Announcement of a U.S.-
of goods trade, that the agreement
total manufactured goods
Korea Free Trade Agreement, 2011 (for could support at least 70,000 U.S.
employment in 2010.
the goods sector only).
export jobs.

6 This result arises from a standard assumption in economic modeling that employment is held constant in order to
estimate the sectoral effects of changes in tariff rates. The model also assumes that prices and wages will adjust to
determine changes in demand for various goods as a result of changes in tariff rates.
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Estimated Trade or Employment
Gain or Loss over Total
Implementation Period
Employment Estimate in
Study/Estimate
(about 10 years)
Perspective
Majority Staff of the Senate Trade
Estimates reflect recalculations using the This estimate is equal to 1.4% of
Subcommittee of the Finance
USITC model, at the request of the
total manufactured goods-
Committee: Updated Assessment of the Subcommittee, to reflect 2009 trade and producing jobs in the United
U.S.-Korea Free Trade Agreement (FTA),
economic conditions. From this
States in 2010.
2011 (for the goods sector only).
recalculation, the Subcommittee
estimates that the agreement has the
potential to create 280,000 U.S. goods-
producing jobs.
U.S.-Korea Business Council: Failure to Estimates that if European Union and
Estimated jobs lost are equal to
Implement the U.S.-Korea Free Trade
Canada implement their FTAs with
0.3% of total goods and services
Agreement: The Cost for American
Korea and the United States does not,
jobs supporting exports for
Workers and Companies, 2009 (for the the United States could lose 345,017
2010.
goods and services sector).
goods and services jobs from U.S. trade
diversion to other countries.
Economic Policy Institute (EPI): Trade
Projects that 159,000 U.S. goods-
Estimate represents 0.8% of al
Policy and Jobs Loss: U.S. Trade Deals
producing jobs could be lost as a result
goods producing jobs in 2010.
with Colombia and Korea Will be Costly,
of increased trade deficits with South
2010 (for the goods sector only).
Korea.
Source: Various studies listed above.
Trade and Employment in the U.S. Economy
In a dynamic economy such as the United States, jobs are constantly being created and replaced
as some economic activities expand, while others contract, reflecting broad macroeconomic
developments. In this process, various industries and sectors evolve over time at different speeds,
reflecting differences in technological advancement, productivity, and efficiency. Those sectors
that are the most successful in developing or incorporating new technological advancements
generate greater economic rewards and are capable of attracting greater amounts of capital and
labor. In contrast, those sectors or individual firms that lag behind are less capable of attracting
capital and labor and confront ever-increasing competitive challenges. Indeed, depending on the
overall state of the economy, some sectors may need to relinquish some capital and labor in order
for others sectors to grow to avoid economic stagnation. Also, advances in communications and
technology have facilitated a global transformation of economic production into sophisticated
supply chains that span national borders and defy traditional concepts of trade that potentially
could involve a greater share of the labor force in trade-related activities.7 How firms respond to
these challenges likely will determine their long-term viability in the market place.
At the plant level, job openings may come from new business openings or from expansions at
existing facilities, including those that are used to support increased exports. Job losses may come
from voluntary departures, involuntary discharges, or from business closures for any reason,
including bankruptcy, personal choice, inability to compete in the domestic market, import
competition, or production shifts. The Bureau of Labor Statistics, Business Employment
Dynamics (BED) Report tracks gross jobs gained and lost in the economy as a whole and in

7 See CRS Report R40167, Globalized Supply Chains and U.S. Policy, by Dick K. Nanto.
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specific sectors and reveals the dynamics underlying gross changes in employment. As Appendix
A shows, 15% of total U.S. employment in 2010 was in the goods-producing industries, while the
services-producing industries accounted for 68% of the employed population. The remaining 17%
of employment was in the government sector, with employment at the State and Local
government level accounting for 15%.
Jobs Gained and Lost for the Economy as a Whole
Table 2shows the gross number of jobs gained and lost for the economy as a whole for the goods-
and services-producing sectors, and for the number of jobs related to exports, during the period
2006-2009. This process of job turn-over typically affects 18-20% of the jobs in the total
economy each year (when percentages of gross jobs gained and gross jobs lost are combined).
This process is stronger in the goods-producing sector of the economy, where a number
equivalent to 24%-27% of the jobs are typically gained or lost each year, compared with the
services sector, where the comparable share is 17%-18%. Such job turn-over is amplified by
economic expansions or recessions, as was the case in 2008-2009, when the economy
experienced the most severe recession in the post-World War II period.8
The data in Table 2 also indicate that
1. Jobs supported by exports represent a small share of the total number of jobs in
the economy and are equivalent to about one-third of the total number of jobs
gained or lost in the economy as a whole during a year. Jobs supported by exports
were equivalent to a small share of the annual turn-over in jobs, ranging from 6%
to 8% of the annual turnover in the economy between 2006 and 2009.
2. Within the goods-producing sector, however, such export-related jobs were
equivalent to 29% to 35% of total jobs, and within the services sector they
averaged about 2%. Similar to overall job gains and losses for the total economy,
jobs supporting exports are sensitive to the business cycle.
3. Business cycle effects were particularly apparent between 2008 and 2009, when
the global economic recession and the financial crisis sharply reduced global
trade. As a result, jobs in the economy supported by trade fell by about 1.8
million jobs, or from 8% of total employment to 6% of total employment, or by
about one-fourth of its share of total employment.
Some would argue that the data on jobs gained and lost throughout the whole economy do not
adequately reflect the concern of workers about job losses. According to data published by the
Bureau of Labor Statistics, during the last two years of the most recent economic expansion
(2005-2007), 3.6 million workers were displaced from jobs they had held for at least three years.
Of those workers, by the end of January, 2008, only 67% had been re-employed in full-time jobs
and only 22% were in jobs where their salaries matched their previous income level.9

8 Job effects of recessions are a lagging indicator, in that job losses typically begin well after the recession is underway,
as employers are slow to let go of workers, hoping the economy will recover quickly. Similarly, job gains typically
accelerate when the economy is well into its recovery and employers are convinced that the recovery will continue into
an expansion phase.
9 Bureau of Labor Statistics. Worker Displacement, 2005-2007, August 20, 2008. “Displacement” is defined as the loss
of jobs held for at least three years for reasons of plant closure, plant relocation, insufficient work, or abolition of the
(continued...)
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Table 2. Jobs Gained and Lost Annually in the U.S. Economy
and Job Turnover Rate, 2006-2009
(Percentages refer to shares of total jobs in that respective sector)

2006 2007 2008 2009
% of
% of
% of
% of
No. of
Total
No. of
Total
No. of
Total
No. of
Total
Jobs
Jobs
Jobs in Jobs
Jobs in Jobs
Jobs in Jobs
Jobs in
Sector
Measure
(000)
Sector (000)
Sector (000)
Sector (000)
Sector
Total
total jobs
136,086 100%
137,598 100%
137,066 100%
131,997 100%
Economy
gross jobs
gained
14,019 10%
13,441 10%
12,704 9%
10,048 8%
gross jobs
lost
11,438 8%
11,941 9%
12,609 9%
15,912 12%
jobs
supported
by exports
8,950 7%
9,540 7%
10,293 8%
8,500 6%
Goods-
total goods-
Producing
producing
Sector
jobs
22,531 100% 22,233 100% 21,419 100% 18,938 100%
gross jobs
gained
2,961 13% 2,677 12% 2,049 11% 1,618 9%
gross jobs
lost
2,512 11% 2,891 13% 3,041 14% 4,238 22%
jobs
supported
by exports
6,576 29% 6,920 31% 7,525 35% 6,000 32%
Services-
total
Producing
service-
Sector
producing
jobs
113,556 100%
115,366 100%
115,646 100%
113,059 100%
gross jobs
gained
11,059 10%
10,763 9%
10,296 9%
8,430 7%
gross jobs
lost
8,928 8%
9,048 8%
9,571 8%
11,672 10%
jobs
supported
by exports
2,374 2%
2,619 2%
2,768 2%
2,500 2%
Source: BLS Business Employment Dynamics (BED) Reports, various years for job gains and losses, and Bureau
of Labor Statistics (BLS): Employment and Earnings Table B-3 for total jobs in the U.S. economy, by sector.
Note: The “% of total jobs” column in shows the “churning” rate, or total employee turnover rate.

(...continued)
position or shift. For the period of the recession of December 2007-June 2009, the data indicate that 1) by January of
2010, 6.9 million workers had been displaced from jobs they had held at least three years; 2) by January of 2010, only
49% had been re-employed full-time; and 3) only 12% of the displaced workers had found jobs paying wages equal to
their previous level. Bureau of Labor Statistics, Worker Displacement 2007-2009, August 26, 2010.
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Benefits and Costs of International Trade
In the current highly globalized economy, international trade has come to represent a complex set
of transactions. Nations not only trade goods and services, but they also trade a broad range of
financial products. In addition, liberalized capital flows and floating exchange rates have greatly
expanded the amount of capital that flows between countries. Basically, trade represents an
exchange of goods or services between two or more willing parties. Such trade allows nations to
use their resources more efficiently in order to maximize the total amount of goods and services
that are available to their citizens, a common definition of a nation’s standard of living. As a
result of this maximization process, nations trade because it serves their national interests. In the
same way that individuals gain by specializing in activities that use their strongest skills and then
trade with others, nations specialize in the production of certain goods and then trade with other
nations for the goods they do not produce. Essentially, nations export in order to import goods
and services they do not produce, or cannot produce efficiently.
Benefits of Trade
Both the benefits and the costs of trade have become well-publicized. These benefits are
categorized as one-time, or static, benefits, which include gains for consumers and gains for
producers, and dynamic benefits that accrue over time and can positively affect the long-term rate
of growth of a country. While it is not always possible to measure these effects precisely, most
economists believe that the net effect of international trade on the national economy as a whole is
positive, that is, that the total gains exceed the total costs. By reducing foreign barriers to U.S.
exports and by removing U.S. barriers to foreign goods and services, trade liberalization helps to
strengthen those industries that are the most competitive and productive and to reinforce the
shifting of labor and capital from less productive endeavors to more productive economic
activities.
Impact of Trade on the Composition of Employment in the Economy
An important issue in estimating employment effects from increased trade and trade agreements
is the difference between the microeconomic viewpoint and the macroeconomic viewpoint. In a
dynamic economy such as the U.S. economy, the composition of jobs is constantly changing as
some sectors grow and other sectors decline. This constant churning would continue even in the
complete absence of international trade. International trade adds to the myriad of factors that
determine the composition of jobs within the economy. From the microeconomic perspective, or
the viewpoint of the individual firm, competitive pressures from international trade, as well as a
broad range of other factors, determine the viability of individual plants or firms. Given these
competitive pressures, firms face a number of choices. How such firms choose to respond to the
competitive pressures likely determines the overall viability of the firm in the marketplace. As a
result of these actions, some firms expand, while others contract.
In contrast, the macroeconomic viewpoint focuses on the net overall direct and indirect economic
effects of trade. Direct effects include changes in the composition of employment for the
economy as a whole. Indirect effects can include secondary and tertiary effects in industrial
sectors that may be more difficult to estimate. It is assumed that trade agreements affect
consumption as a result of the impact of the agreements on the prices of goods. Presumably, trade
agreements lower the tariffs on imported goods, which result in lower prices on imported goods.
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Consumers benefit directly from the lower prices of imported goods to the extent that they

shift their consumption in favor of the lower-priced imported goods. They also benefit from an
increase in their real incomes as a result of the lower prices of imported goods. Consumers may
benefit further from lower domestic prices to the extent that domestic producers lower their prices
in response to the competition from imports.
Throughout this process, however, the total number of jobs in the U.S. economy is not affected,
that is, trade agreements do not affect the total number of jobs in a large open economy such as
the U.S. economy, but can affect the composition of employment. The total number of jobs in the
U.S. economy is determined by such macroeconomic factors as productivity growth, the growth
rate of the population, and the pace of technological innovation. Changes in any of these
“structural” factors, together with short-term fluctuations in the business cycle and shifts in the
relative value of the dollar against other currencies, may overwhelm effects of any industry-wide
job “gains” or “losses”10 from trade and trade agreements.
As the U.S. economy shifts the composition of production from labor-intensive import-competing
products to capital-intensive export-oriented products, more labor than capital is released.
Because those displaced from labor intensive jobs may not have the skills to immediately become
employed in more capital intensive jobs, labor dislocations in the economy may result.
Adjustment Costs of Trade
Economists have long recognized, however, that the long-term production gains associated with
greater specialization in the economy create a wide range of short-term adjustment costs as labor
and capital are shifted from less efficient industries and activities into more efficient industries
and activities. These adjustment costs are difficult to measure, but they are potentially large over
the short run and can entail significant dislocations for some segments of the labor force, for
some companies, and for some communities.11 In negotiating trade agreements, governments are
most mindful of the adjustment costs involved and, at times, are constrained in their ability to
fashion such agreements because of opposition by groups within the economy that would bear
heavy costs from trade liberalization. These costs are especially acute for labor groups within the
economy that lack advanced education and training skills that provide them with the means
necessary to be redeployed in other sectors of the economy.
Issues Involved in Quantifying the Employment Effects of Trade
Quantifying the relationship between international trade and the composition of employment in
the economy is problematical and complex. For the United States, international trade is not the
primary force creating employment in the economy. While trade agreements with specific
countries may well benefit certain sectors of the economy, their effect is dubious as an
employment program for the economy as a whole. In addition, changes in the business cycle can
affect the overall state of the economy in ways that far outweigh the effects of almost all trade
agreements, given the already highly open state of the U.S. economy. In addition, significant gaps

10 The words “gain” and “loss” are in quotes because, when an economy is functioning at full employment, total jobs
are neither gained nor lost for the economy as a whole, but rather shifted among industries.
11 For an overview of this issue, see Globalization, Worker Insecurity, and Policy Approaches, by Raymond J. Ahearn,
CRS Report RL 34091.
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in data, particularly relative to the services sector, hinder the ability to model the effects of trade
agreements that lower barriers to trade in services. These gaps are important, because the services
sector accounts for 69% of output and 68% of full- and part-time employment in the U.S.
economy and increased trade in services offer potentially large gains for the U.S. economy.
In addition, concerns over the impact of a trade agreement on employment often focus on a
comparison of labor compensation rates between countries. For instance, some groups in the
United States are concerned that U.S. employment could be negatively affected because labor
compensation rates, in general, are lower in South Korea. Measures of competitiveness, however,
more accurately reflect not only the rate of labor compensation, but the rate of compensation
relative to the level of productivity. Rates of labor compensation in the United States could be
many multiples of that in South Korea, but as long as U.S. workers remain more productive than
workers elsewhere, U.S. goods would continue to be competitive in the global marketplace. In
general, most estimates of employment effects do not incorporate measures of productivity in
their analysis.
Various approaches typically have been used to estimate the employment effects of trade
agreements, including the KORUS FTA. In most cases, these approaches share some common
features. Similar to other free trade agreements, the KORUS FTA is a comprehensive agreement
that includes provisions to (1) lower tariffs on trade in goods and agriculture; (2) reduce formal
barriers to trade in services; and (3) encourage increased flows of investment. Barriers to trade in
services, however, are extremely difficult to quantify in monetary terms, and it is equally difficult
to estimate the impact of an agreement on potential flows of investment. As a result, most
approaches derive their estimate of changes in employment almost exclusively from estimated
changes in the value of exports and imports of goods under the agreement. Even these estimates,
however, are imprecise and sensitive to the assumptions that are used. Appendix B explains some
of the most common assumptions used in economic models.
Problems in Linking Changes in Production with Changes
in Employment
In the Department of Commerce report on employment in the economy supported by exports
mentioned above, the International Trade Administration (ITA) argues that the job estimates
should not be used with projected changes in trade to estimate potential employment effects from
trade agreements. It says:12
Averages derived from IO [input-output]13 analysis should not be used as proxies for
change. They should not be used to estimate the net change in employment that might
be supported by increases or decreases in total exports, in the exports of selected
products, or in the exports to selected countries or regions. (Emphasis added)
The averages are not proxies because the number of jobs supported by exports usually does
not change at the same rate as export value. The rate is not the same because other factors,
such as prices, resource utilization, business practices, and productivity, do not usually
change at the same rate. In addition, the material and service inputs and the labor and capital

12 U.S. Department of Commerce, International Trade Administration; Exports Support American Jobs, by John
Tschetter (no published date, but the report was released in 2010), p. 3.
13 Input-output analysis takes into consideration the outputs of one industry as inputs in another.
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inputs differ significantly across types of exports. For example the labor requirements for an
exported aircraft are significantly different from those of an exported agricultural product or
an educational service.
Ideally, estimates of trade changes from tariff reductions would be multiplied by figures which
reflect actual changes in employment (based on the mix of goods traded) that would occur at the
margin as a result of changes in the volume of goods traded. According to the ITA, though, such
data do not exist. The only data that are available reflect the estimated average number of jobs
supported across the U.S. economy by a given level of exports. According to the ITA, “As a
result, multiplying trade estimates from the computable general equilibrium (CGE) models
by employment averages would tend to overestimate the actual number of jobs potentially
lost to trade changes.” (Emphasis added.)
The ITA also indicated that
In addition, estimates of the average number of jobs associated with exports cannot be
adjusted for fluctuations in manufacturing capacity over the course of the business cycle. As
explained by the USITC, the more slack there is in the U.S. economy, the more potential
there would be for job creation:14
During periods of slack business activity, increased output, such as exports, would tend to
increase employment, to lower unemployment, and to increase labor force participation.
Conversely, during periods of high business activity, when industry operates at or near full
capacity and employment, increased output, including output for exports, tends to raise
employment less—if at all—and instead mainly shifts employment to industries that pay
higher wages.
In a number of cases, the estimates developed by the ITA regarding the average number of U.S.
jobs supported by exports have been used, or in many cases one could argue, misused, to estimate
the number of jobs that potentially could be affected by trade agreements. In some cases, the data
have been used in reverse to argue that if a certain number of jobs were supported by a billion
dollars of exports, then that same number could be used to argue that a certain number of jobs
would be “lost” by a billion dollars of imports, so that any net increase in imports associated with
a trade agreement would necessarily result in a loss of employment for the economy. The
composition of U.S. imports, however, is fundamentally different from U.S. exports. While some
imports and exports represent clearly substitutable items, other imports represent inputs to further
processing, or are items that are not available in the economy. The ITA has issued various
statements indicating that using the data in this manner is not appropriate. As the ITA has
indicated, the employment estimate is not a multiplier and should not be used to estimate jobs that
are associated with exports or imports in a multiplier fashion. In addition, the ITA estimates relate
to the average number of jobs supported by exports across a broad section of the economy and
should not be used in conjunction with trade agreements where the approach should more
appropriately focus on estimating the change in the composition of employment that are
associated with a change in trade as a result of a trade agreement.

14 ITA. Exports Support American Jobs, p. 3-4.
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Estimates of Employment Effects of the
KORUS FTA
The USITC Estimate
The USITC15 used standard analysis to measure the long-term trade (but not employment) effects
of a one-time full implementation of the KORUS FTA after the full implementation period of 10
years on U.S. exports and imports. The ITC used an economic model known as the Global Trade
Atlas Project (GTAP), located at Purdue University16 to estimate changes in trade (exports and
imports) from changes in tariff rates and tariff rate quotas. The results are expressed as
proportional effects (percentage increases or decreases in trade) for various sectors, relative to the
projected 2008 economy. According to this estimate, if the KORUS FTA were to go into effect,
U.S. merchandise exports to South Korea likely would increase by an estimated $9.7 billion to
$10.9 billion over the first decade after enactment, while merchandise imports from South Korea
likely would increase by an estimated $6.4 billion to $6.9 billion over the first decade. This would
result in an estimated net increase in U.S. exports of $3.3 billion to $4.0 billion during the first
decade after enactment.
The University of Michigan Estimate
In a slightly different approach, economists at the University of Michigan used a standard
macroeconomic model to estimate the effect of a negotiated reduction in tariff rates on export and
import prices and then estimated changes in the volumes of goods exported and imported arising
from those change in prices, as indicated in Table 3. They estimated, using 2006 data, that U.S.
bilateral exports to Korea would increase by $9.2 billion and that U.S. imports from Korea would
increase by $6.9 billion during the first ten years after implementation of the agreement.17 The
total number of jobs gained or lost in the economy is assumed to be zero, because the model
begins with the assumption of full employment. Given this constraint of no changes in the overall
number of jobs gained or lost, the estimates represent expected changes in the composition of
employment among sectors in the economy. As a result, the estimates should not be viewed as
projections of the exact number of jobs gained or lost by sector, but as estimates of the magnitude
of the changes that could occur. Given this caveat, the estimates indicate that 85% of the
projected job gains would be in the agricultural sector, and 90% of projected job losses would be
in six industrial sectors: government services, trade and transportation services, manufactured
textiles and apparel, transportation equipment, metal products, and machinery equipment.
Standard economic theory provides some insight into which sectors may be expected to gain, and
which sectors may be expected to lose employment as a result of increased trade. Accordingly,
those sectors that represent areas of greatest comparative advantage18 based on the economy’s

15 See complete titles and authors of this study on page 2 of this report.
16 The databases are cooperatively produced and maintained by researchers and scholars. The model includes many
sectors and all countries in the world.
17 University of Michigan, op. cit., p. 44.
18 A country is said to have a comparative advantage if it can produce goods more efficiently than a competitor based
on their respective endowments of the factors of production: land, labor, capital, and managerial ability. A country is
(continued...)
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endowment of the factors of production (land, labor, capital, technology, and entrepreneurial
ability), are the ones most likely to gain employment. Compared with other countries, the United
States has a comparative advantage in capital-intensive products, many services, and agricultural
products that characterize U.S. exports. This is in contrast to most developing countries, that have
a comparative advantage in more labor-intensive products that characterize U.S. imports.
Table 3. University of Michigan Estimate of Potential Sectoral Employment Effects
of the Korea-U.S. Free Trade Agreement
Projected Change in Employment
Relative to 2006 level
Change in Share of
Change in Number
Total Industry
Industry
of Workers
Employment (%)
Rice 460
1.1
Wheat 388
0.2
Other grains
7,446
1.6
Vegetables and fruits
1,064
0.2
Oil seeds
7,151
1.7
Sugar 67
0.1
Plant-based fibers
63
0.0
Other crops
3,390
0.3
Livestock 1,092
0.1
Mining
-363 -0.0
Food, beverages, and tobacco
1,880
0.1
Textiles
-4,426 -0.5
Wearing Apparel
-3,482 -0.6
Leather products and footwear
-171 -0.2
Wood and wood products
-483 -0.0
Chemicals 119
0.0
Nonmetallic mineral products
289
0.0
Metal products
-1,077 -0.0
Transportation equipment
-2,287 -0.1
Machinery and equipment
1,438
0.0
Other manufactures
-186 -0.0
Construction
-68 -0.0
Electricity, gas, and wager
-639 -0.0
Trade and transport
-5,379 -0.0

(...continued)
said to have a competitive advantage if it can produce a product at a lower cost than a competitor.
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Projected Change in Employment
Relative to 2006 level
Change in Share of
Change in Number
Total Industry
Industry
of Workers
Employment (%)
Other private services
-569 -0.0
Government services
-5,714 -0.0
TOTAL
0 -0.0
Source: Economic effects of a Korea-U.S. Free Trade Agreement, by Kozo Kiyota and Robert M. Stern,
University of Michigan, April 2007. Source of data for table is ILO (2006), UNIDO (2006) and World Bank
(2006).
Note: Numbers of workers result from estimated share changes in trade projected onto 2006
employment data.
Derivative Estimates
Two additional estimates of the employment effects of the KORUS FTA are based on the data
developed by the ITC on the number of U.S. jobs supported by exports.
In one estimate, the White House apparently used the ITC data to estimate that an additional
70,000 U.S. workers would be supported by new exports under the proposed KORUS FTA. This
estimate appears to be based on data developed by the ITC regarding the amount of additional
exports that would be created by lowering tariff rates, combined with the data on the number of
U.S. jobs supported by exports. As previously indicated, the ITA has stated that the data
developed on the average number of jobs in the economy that are supported by exports should
“not be used to estimate the net change in employment that might be supported by increases or
decreases in total exports, in the exports of selected products, or in the exports to selected
countries or regions.” Some could argue, however, that the White House estimate honored this
caution by stating only that the proposed KORUS FTA “would support” (not create) 70,000 U.S.
jobs.19
In another estimate based on data provided by the ITC, the Majority Staff of the Senate Trade
Subcommittee indicated that the KORUS FTA has the potential to create about 280,000 American
jobs. This estimate of job gains appear to have been derived from applying the estimates of
changes in trade developed by the ITC combined with the ITA estimate on the average number of
jobs in the U.S. economy that are supported by exports. The Subcommittee asked the USITC staff
to “examine the agreement based on current data and economic conditions.” The Trade
Subcommittee staff then found that, reflecting “2009 trade and economic conditions,” the results
show that “in an economy with substantial unemployment and underused capital, the agreement
has the potential to create about 280,000 American jobs.”20

19 The White House. Remarks by the President at the Announcement of a U.S.-Korea Free Trade Agreement, op. cit.
20 Majority Staff of the Senate Trade Subcommittee, Updated Assessment of the U.S.-Korea Free Trade Agreement
(FTA), op. cit.
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Additional Estimates
U.S.-Korea Business Council Estimate21
The U.S.-Korea Business Council estimated that the United States would experience a potential
loss of 345,000 goods and services export jobs if the KORUS FTA is not implemented. The study
apparently used a U.S. Department of Commerce, Bureau of Economic Analysis “National
Income and Product Accounts” table of the number of full-time equivalent employees by industry
for the years 2007-2009. The Council derived their estimate of jobs lost based on the assumption
that both Canada and the European Union (EU) implemented their proposed trade agreements
with South Korea, and the United States did not. The estimate assumes that exports to South
Korea primarily from Canada and the EU would be substituted for a certain share of U.S. exports
of goods and services, in an amount equal to $35.1 billion. The Council estimate appears to
incorporate a number of additional assumptions, including the following:
1. U.S. Trade Diversion. The estimate assumes that U.S. jobs would be lost,
because exports from Canada and the EU would replace a large share of those
from the United States as a result of lower tariffs on Canadian and EU goods. In
deriving this result, the estimate apparently assumes that there would be a large
amount of trade diversion without any trade creation effects, and it assumes that
exports from Canada and the EU are completely substitutable for U.S. exports.
There is no evidence provided in the estimate that either of these assumptions is
likely to hold should the KORUS FTA not be approved.
2. Total alignment of consumer preferences with tariff reductions. The estimate
also offers no corroboration for the assumption that a change in tariff rates and,
therefore, in goods prices, would spur consumers in the respective countries to
alter completely their consumption patterns to the detriment of U.S. exports.
While some consumers are likely to alter some of their preferences based on the
relatively lower prices of some goods, it is debatable whether exports from
Canada and the EU would substitute for even a large share of U.S. exports
3. No positive U.S. trade effects from potential gains in EU and Canadian real
incomes. The estimate also does not account for a broad range of associated
economic effects that likely would arise with trade agreements between South
Korea and Canada and the EU that potentially could have a positive effect on
U.S. exports. For instance, the estimate does not account for changes in the real
incomes of Canadians and Europeans that could arise from this trade agreement.
As a result of the changes in their real incomes, Canadians and Europeans could
be expected to increase their consumption of domestic and foreign goods, which
potentially would boost U.S. exporters, who are major suppliers to both Canada
and the European Union.
Economic Policy Institute Estimate
The Economic Policy Institute estimated that the KORUS FTA would result in a loss of 159,000
U.S. goods-producing jobs stemming from a projected increase in the trade deficit with South

21 See complete title and authors of this study on p. 2 of this report.
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Korea. This estimate was derived using an unconventional approach. The EPI did not derive its
estimate directly from estimated changes in trade or the potential employment effects from a free
trade agreement between South Korea and the United States. Instead, the EPI derived its estimate
by averaging the changes that occurred in U.S. trade with Mexico between two different periods:
the two seven-year periods immediately before and after the North American Free Trade
Agreement (NAFTA) went into effect in 1993; and the two seven-year periods immediately
before and after China joined the World Trade Organization in 2001. It then used the average rate
of growth in exports and imports between these periods to estimate percentage changes in U.S.
trade with South Korea under the proposed KORUS FTA. This estimate suggested that the
KORUS FTA would result in a net increase in imports (a trade deficit) rather than net increase in
exports. Next, the EPI study used an estimate of jobs associated with trade to estimate the number
of jobs that would be lost in the United States as a result of a projected increase in the U.S. trade
deficit with Mexico. The EPI approach made a number of assumptions, including
1. Trade proxies. This approach uses a non-trade-weighted average of U.S. trade
with Mexico and China as a proxy for estimated U.S. trade with South Korea
with no clear explanation of why these two cases match the Korea case. Data on
U.S. trade with South Korea are readily available, so it is not clear why these data
are not used to estimate potential changes. Also, U.S. trade with South Korea is
about one-fourth that of U.S. trade with Mexico, and the United States and South
Korea do not share a common border as is the case between the United States and
Mexico.
2. Exchange rates. There are numerous differences between the movement in
exchange rates among the three countries considered in this analysis: China,
Mexico, and South Korea. For Mexico, the second seven-year period following
adoption of NAFTA coincided with the devaluation of the peso. This boosted
U.S. imports from Mexico and likely contributed to a decline in U.S. exports
there. Unlike the peso, China’s currency is linked primarily to the value of the
U.S. dollar. The South Korean won is determined mainly by market forces.
3. Trade and jobs. The EPI estimate also uses some form of an estimate of jobs
related to trade similar to that developed by the ITA on exports supporting U.S.
jobs to estimate the number of U.S. jobs that would be lost as a result of a
projected increase in the U.S. trade deficit with South Korea. As previously
indicated, the ITA has warned that this approach to estimating jobs gained or lost
from trade is not reliable.
Conclusion
The 112th Congress likely will consider legislation to implement the KORUS FTA. So far, much
of the debate surrounding the agreement has focused on the potential impact the agreement could
have on U.S. employment, particularly employment in certain sectors of the economy. Given the
currently high rate of unemployment, it is not uncommon for communities or workers to raise
concerns over the impact of a new FTA. Indeed, for some communities that already are hard hit
by high rates of unemployment or have experienced plant closings due to foreign competition, the
KORUS FTA could pose additional challenges.
An analysis of the currently available estimates of the potential effects of the KORUS FTA on
U.S. employment, however, raises a number of questions concerning the overall usefulness of the
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estimates. Economic modeling naturally incorporates various assumptions and entails differing
methodologies that can have a profound effect on the estimates that are generated. Standard
models incorporate standard assumptions and use standard approaches that generally are well
explained. The mark of a good economic model often is one that uses assumptions and
methodologies that seem reasonable and are not geared toward generating any particular result. In
contrast, non-standard models often use non-standard assumptions and approaches that are
difficult to justify and that seem to have been chosen in order to generate pre-determined results.
Given the current state of economic modeling and data availability, the most accurate models
likely can provide only rough estimates of the magnitude of the potential changes in employment
in certain sectors, but would not offer estimates of the exact size of the shifts in employment.
Estimates of employment effects of new FTAs often tend to be highly subjective and can be
misleading, because they represent a partial accounting of the total economic effects of new
FTAs. In most cases, FTAs are comprehensive agreements that include provisions for goods,
services, and investment. Estimates of employment effects of the KORUS FTA, however, focus
narrowly on employment effects in the goods sectors and neglect the potential effects in the
services and investment areas. In addition, the estimates neglect a broad range of benefits for the
economy as a whole that potentially can provide consumers with large economic benefits and that
can yield broad productivity and efficiency gains for the economy that may well enhance
employment. As a result, estimates of the employment effects of new FTAs may serve poorly as
an indicator of the total impact of a new FTA on the economy as a whole.
As policymakers consider the KORUS FTA and other FTAs, they likely will weigh the results of
a range of estimates of the employment effects of the FTAs to gauge the impact of the
agreements. In this process, policymakers likely would be aided by estimates that clearly state the
assumptions that are used and that inform policymakers about the broad implications of such
agreements for the economy as a whole. In addition, policymakers likely would benefit from
more reliable data on the potential magnitude of such agreements on specific sectors that would
allow policymakers to craft programs that could assist those most directly affected by the
agreements. As a result, policymakers may benefit from a number of initiatives to improve
information and data on the impact of international trade on the economy. These might include
• increased information and data on services in the economy, including the shifting
of in-house services from the manufacturing sector to the services sector and the
formal and informal barriers to U.S. services posed by major trading partners;
• better data on worker dislocations including the reasons for those closings;
• better understanding of the development of global supply chains and the role they
are playing in the U.S. economy.

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Appendix A. Employment Population and Shares of
the Economy, by Major Industry and Sector, 2010
Share of total private
Sector
Employment (in thousands)
employment (%)
Total private including
agriculture
132,414 100%
Total goods producing including
agriculture 19,971
15
Mining and logging
731
1
Construction 5,487 4
Manufacturing 11,568 9
Agriculture 2,185
2
Services 90,194
68
Trade, Transportation, and
Utilities
24,742 19
Information 2,699
2
Financial Activities
7,616
6
Professional and Business
Services 16,898
13
Education and Health Services
19,755
15
Leisure and Hospitality
13,065
10
Other Services
5,419
4
Government 22,249
17
Federal 2,852
2
State 5,142
4
Local 14,255
11
Source: U.S. Department of Labor, Bureau of Labor Statistics, Economic News Release, Table B-1 (employees
on nonfarm payrolls) and Table A-8 (for agriculture, January 2011.

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Appendix B. Standard Assumptions of
Economic Models
In order to assess the validity of the various estimates of the employment effects of the KORUS
FTA, it is first necessary to understand how the economic models work and the assumptions that
are made. The standard approach to estimating the effects on U.S. employment associated with
trade agreements follows a number of steps, although most of these steps are not included in the
discussion of the estimates. In general, these steps include the following:
1. Estimating the impact a change in the tariff rate would have on a change in the
prices of goods. For instance, if tariff rates are lowered by 10%, would goods
prices also fall by 10%? Are the changes in tariff rates accomplished at once, or
are they reduced slowly, according to a set schedule? If tariff rates are adjusted
over time according to a set schedule how does that affect the rate at which goods
prices adjust?
2. Estimating the impact a change in goods prices would have on a change in sales
of those goods. This estimate attempts to quantify the responsiveness of
consumers to changes in prices. In markets with a number of close substitutes,
the consumer response could be strong with consumers buying less of a particular
product as its price rose relative to those of similar products. For goods with few
substitutes, consumers would be less responsive to changes in prices.
3. Estimating the impact a change in sales would have on a change in output or a
change in employment. A change in employment associated with a change in
sales would depend, at the very least, on the level of plant utilization, the level of
productivity, and the availability of labor.
In attempting to estimate these intermediary steps, most models incorporate a number of
assumptions to reduce the high level of variability that is intrinsic in such estimates. Often these
additional assumptions are not well explained. In general, these basic assumptions are:
1. Changes in Tariff Rates Will Translate Directly into Price Changes. Most
models assume that any change in the tariff rate will be passed along completely
to the change in the prices of traded goods. In most cases, however, tariff rates
are not adjusted completely at the time of implementation, but are adjusted over a
set schedule that can encompass a decade or longer. Also, there is no guarantee
that the prices of traded goods would adjust at exactly the same rate as tariff rates
are adjusted. They may be passed along at a differential rate or simply absorbed
by the exporter.
2. Exchange Rates Will Remain As They Are. In most cases, the estimates do not
make any assumptions concerning potential changes in the exchange rate of the
dollar as a result of a trade agreement. In addition, the exchange value of
currencies of competitors could also be affected in ways that could blunt the
expected change in exports or imports associated with a trade agreement.
3. Consumer Purchases Will Follow Tariff Reductions. Most of the estimates on
changes in employment are based on the assumption that reductions in the prices
of goods associated with a drop in the rate of tariffs would result in a complete
substitution of goods toward the FTA countries and away from other foreign
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suppliers. In general, there may well be some goods within the total basket of
traded goods that consumers consider easily substitutable (such as steel and
fasteners), but consumer choices often are predicated on more than relative prices
(such as brand names and quality) and, therefore, the rate of substitution overall
can be quite low. To the extent that consumers do not shift their purchases based
on changes in prices, the change in employment would be blunted. In addition,
standard economic theory argues that trade agreements generally entail both trade
diversion, or the substitution of lower-priced goods among the parties to the
agreement for the now higher-priced goods from other suppliers, and trade
creation. Trade agreements can create trade by increasing efficiency in
production and by increasing the real incomes of consumers that, in turn, leads to
a greater level of consumption of both domestic and imported goods. To the
extent that a trade agreement creates additional trade, it could have a positive
effect on employment.
4. Employment or Wages Will Not Change. Another assumption that often is
made is whether employment or wages should be held constant. Such an
assumption often is necessary in order to generate results from the economic
models. By holding employment constant, the model is attempting to estimate the
change in the composition of employment that would be associated with a trade
agreement. This assumption would allow wages to change, although most models
do not attempt to estimate changes in wages. As a result, these models generally
attempt to highlight the magnitude of the impact of an agreement on various
sectors in the economy, rather than attempting to generate precise estimates of
the actual number of jobs that may be gained or lost by individual sectors. In
contrast to these assumptions, models that hold wages constant allow
employment to change in an effort to estimate changes in the number of jobs in
various economic sectors. Since changes in wages often lead to changes in
employment, this assumption is questionable. In either case, the estimates usually
attempt to aggregate the total cumulative effects over a number of years, often a
decade, in order to derive an estimate of the overall change in employment.
While such an assumption is a necessary condition for generating results, the
assumptions compromise the validity of the results, since the composition of
employment in the economy over a decade can change quite noticeably, even in
the complete absence of international trade, due to business cycle effects and the
constant churning that occurs. Currently none of the estimates of the employment
effects of trade agreements incorporate either business cycle or other
transformational effects into the estimates.
Key Steps in Converting Changes in Tariffs to Changes in Employment
In general, there are a number of steps involved in converting changes in tariffs into changes
in employment. In most cases, these steps are not explicitly explained. The chart below
summarizes these three steps.

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Table B-1. Key Steps Involved in Converting Changes in Tariff Rates
into Changes in Employment
Step 1
Estimate changes in trade (exports and imports) arising from a change in tariff rates.a
Step 2
Link changes in trade (exports or imports) to changes in the industrial sectors that
produce those goods.b
Step 3
Link changes in industrial production to changes in employment.c
a. This step assumes that a reduction in the applied rate of tariffs would lead to a similar reduction in the
prices of imported goods. As a result of the reduction in prices, it is assumed that consumer demand would
shift from other goods in favor of the lower-priced goods, so that there is a one-for-one substitution of
goods, or that the process of tariff reduction is a zero-sum game, with gains by the FTA partner comparable
to losses by domestic or non-FTA suppliers.
b. Linking traded goods with their respective industries is complicated, because the data collected on exports
and imports are entirely different from those collected on the industrial composition of the economy.
Whereas exports are recorded as the number of specific goods exported at a certain price, the industrial
composition of the economy is organized not by individual commodity, but by productive processes, so that
it requires considerable effort to link together the goods produced for export with the industry that
produced those goods. However, in recent years, classification “dictionaries” have been developed that can
make these translations easier.22
c. In a joint project, the Department of Commerce (DOC), Bureau of Economic Analysis (BEA), and the
Bureau of Labor Statistics (BLS), estimated the average number of jobs supported by exports in the U.S.
economy based on the dol ar value of output relative to the average number of jobs required to produce
that output for each industry.23 As a result of this joint effort, the Commerce Department determined in its
2010 update that on average $166,000 in goods exports, $216,000 in services exports, or a weighted
average of $180,000, supported one job in each respective sector. As indicated previously, this estimate
should not be used to estimate the number of jobs lost as a result of imports, or a trade deficit.

Author Contact Information

Mary Jane Bolle
James K. Jackson
Specialist in International Trade and Finance
Specialist in International Trade and Finance
mjbolle@crs.loc.gov, 7-7753
jjackson@crs.loc.gov, 7-7751



22 U.S. Department of Commerce, International Trade Administration. Exports Support American Jobs: Updated
Measure Will Quantify Progress as Global Economy Recovers, International Trade Research Report no. 1, 2010, p. 2-3,
updated by unpublished regression-related estimates by the author.
23 The Department of Commerce published results of an earlier version of this model in 1996 and published its first
major update of that data in 2010 (14 years later), reflecting updated employment/output relationships for the years
1993-2008. U.S. Department of Commerce, Economics and Statistics Administration. U.S. Jobs Supported by Goods
and Services Exports, 1983-1994, by Lester A. Davis, Research Series OMA-1-96, November, 1996. This report was
the sixth in a series published since 1983 to measure the contribution of exports to the U.S. economy and employment.
Congressional Research Service
20

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