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THE HIDDEN COST OF GLOBALISATION: UK evidence that import competition leads to mental distress

The competition brought about by globalisation can hurt workers'' mental health. That is the central finding of research by Italo Colantone, Rosario Crinò and Laura Ogliari, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016.

Although free trade has many benefits, such as lower prices and higher productivity, it can also mean more stress for workers who now have to compete with foreign firms. By studying roughly 13,000 people in the British Household Panel Survey (BHPS) and how they measure their mental distress, the authors shed some of the first light on this link.

The researchers find that a one standard deviation increase in competition worsens mental health by 1.2 percentage points. This would mean that workers have to be compensated with £200 a year to make up for the stress and loss of happiness, which is around 1.5% of the average annual wage.

This effect does not depend on age, gender or whether someone is working full-time, part-time, permanently or temporarily, and is caused by workers having to compete more for their jobs (which might cause their wages to fall). Import competition is less of a problem for people who are self-employed or have a long tenure at work, as they are typically not affected as much. The authors conclude:

''Our results suggest that the response of individuals'' mental health to globalisation should be taken into account for an accurate assessment of the net gains to society from trade liberalisation.''

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This research studies the relationship between globalisation and workers'' mental health. The authors find that an increase in import competition increases workers'' mental distress in the UK. The average worker would need a yearly monetary compensation of around £200 to make up for her loss in wellbeing after an import shock.

Trade liberalisation may raise countries'' welfare through a variety of channels, such as lower prices and higher productivity. But recent and influential empirical studies show that trade liberalisation is also associated with substantial adjustment costs for workers in import competing jobs (see, most notably, Autor et al, 2013, 2014).

Yet the focus of these studies is limited to labour market outcomes, such as individuals'' earnings and employment status. The new study sheds the first light on a new trade adjustment cost: the impact of import competition on individuals'' subjective wellbeing. It shows, in particular, that import competition determines a severe worsening of individuals'' mental health – a hidden, yet economically important, cost of globalisation.

Mental health is becoming a primary concern for governments worldwide (The Economist, 24 October 2015). This analysis focuses on the UK over the period 1995-2007, a time in which mental health has become a top clinical priority for the government. In 2007, the direct cost of treatment associated with mental illness reached £22.5 billion, absorbing around 12% of the overall NHS budget. During the same period, the UK has witnessed a sharp increase in import competition, with growth in real imports (75%) outpacing growth in real output (27%) and exports (52%).

The researchers employ data from the British Household Panel Survey (BHPS), which covers a representative sample of approximately 13,000 individuals interviewed every year. For each of them, there is a yearly measure of mental distress according to the 12-item version of the Generalized Health Questionnaire indicator (GHQ-12). The study relates this measure to changes in import competition in the industry of employment over time.

The results show that import competition substantially raises mental distress. Quantitatively, a one standard deviation increase in import competition worsens mental health by 1.2 percentage points. In turn, the average worker would need a yearly monetary compensation of around £200 to make up for her utility loss. This accounts for about 1.5% of the average yearly net wage in the sample.

The researchers find the effect of import competition to be relatively stable across individuals of different age and gender, as well as across full-time and part-time employees, and across permanent and temporary workers. The effect is milder for long-tenure workers and for the self-employed, which, respectively, have a stronger attachment to their firms and are more likely to operate in low tradable jobs that are little exposed to foreign competition.

The study provides evidence that the effect of import competition works through a complex set of mechanisms. In particular, an increase in import competition determines a higher likelihood of job displacement and, for continuously employed workers, a lower wage growth. Both changes in labour market conditions are in turn associated with higher mental distress.

In addition, and most importantly, import competition worsens mental health also for workers who witness no change in observable labour market outcomes, by increasing stress on the job and by worsening expectations about the future.

Overall, these results suggest that the response of individuals'' mental health to globalisation should be taken into account for an accurate assessment of the net welfare gains from trade liberalisation, and for a proper accommodation of trade shocks.

The Hidden Cost of Globalization: Import Competition and Mental Distress – Italo Colantone (Bocconi University), Rosario Crinò (Catholic University of Milan, CEPR and CESifo), and Laura Ogliari (Bocconi University)