Proponents of market reforms are quick to tout the benefits that markets have to deliver. But as Abhijit Banerjee and Esther Duflo, two of this year’s Nobel laureates in economics, repeatedly show in “Good Economics for Hard Times,” some apologists have a tendency to overpromise. Markets, the authors remind us, can be sticky. Pro-market reforms like freer trade, for instance, only work as well as advocates predict when people can freely move to better opportunities.
In reality, people don’t move so fluidly to new industries or regions. The authors cite a 2013 comparative study of regional labor markets in the U.S.—regions defined by commuting patterns—that were affected by the expansion of Chinese trade between 1991 and 2007. The study showed declines in total employment in the American regions hardest hit by Chinese competition. This should not have happened if workers had simply moved within the same region to an industry that benefited from cheaper imports. Workers could have also, in theory, moved to an expanding region from a declining one. But workers do not move easily, even when an expanding region is nearby. A 2010 study of labor mobility in India following trade liberalization in 1991 found a similar result of people stuck in declining districts. Yet another study, from 2014, found a different kind of immobility in Bangladesh, where people in rural areas did not migrate to cities as much as predicted by the urban-rural wage discrepancy.
