07

Michael J. Hicks

This column was originally published on the Ball State University Center for Business and Economic Research Weekly Commentary blog.

By Michael J. Hicks
September 7, 2025

A fantastically high share of our debate over economic policy involves a false lesson of the China Shock and its effect on factory jobs and communities. The real lesson is that education matters—and that has been decidedly ignored.

In 2001, the U.S. fully opened trade with China, which had slowly been growing its imports worldwide.  From 1990 until 2007, when the recession stopped the growth of imports, the U.S. lost 4.2 million factory jobs. That was the China Shock.

Most of the job losses during the China Shock were due to automation of factories, not trade with China. Here’s the big picture: While we lost factory jobs, the economy was actually booming. From 1990 to 2007, America created 29 million new jobs overall. The problem? These new jobs required different skills than factory work.

All 29 million of those new jobs went to people with college degrees or some college training. Workers with only high school diplomas were left behind. So, men (and it was mostly men) who lost factory jobs between 1990 and 2007 had few good labor market options other than going back to school.

The educational divide of the China Shock is so pronounced that it appears in regional data across cities and states. We can see this by dividing urban counties into two groups—those with above-average college graduation rates and those below. The educated counties captured more than 100% of economic growth from 1990-2007. The other half actually shrunk.

This educational divide is driving much of our current populist policy debate. We’re focusing on “left behind places” with policies designed to bring back factory jobs; however, the places that felt the bulk of job losses from 1990-2007 were simply not prepared for a modern economy. Schools were weak and ineffective, and a scant share of young people headed off to college. When jobs disappeared, the educated left.

Still, the human toll of neglecting places is trivial compared to the neglect of individuals and families. The real tragedy isn’t that some communities declined, it’s that we failed to give people the education they needed to adapt and thrive elsewhere.

The grand lesson of the China Shock was that well-educated workers living in cities full of better-educated workers thrived, even when facing deep factory job losses. Education made these places more resilient, causing new businesses to relocate there and acting as a magnet for displaced workers.

The uniquely disappointing aspect is how ill-prepared most places were for change that announced itself in the 1950s and 1960s. Judging from the number of elected officials who think prosperity is just one more tax cut away, most Hoosiers haven’t made the mental leap to the 21st century.

But, in the nearly two decades since the China Shock ended, too many elected leaders are foisting that old lie on young people—that factory jobs will return. They won’t.

Worse still, Indiana has cut spending on education of all types. In fact, our state hasn’t spent this small a share of our GDP on education for several decades. At the moment that it became blindingly obvious that prosperity would only attach itself to well-educated places, we decided to follow a different path.

I sure hope this time is different, but if there’s one thing I’ve learned in researching local economic growth for more than a quarter century, the next time is almost never different.

Michael J. Hicks is professor of economics and the director of the Center for Business and Economic Research at Ball State University. He previously served on the faculty of the Air Force Institute of Technology’s Graduate School of Engineering and Management and at research centers at Marshall University and the University of Tennessee. His research interest is in state and local public finance and the effect of public policy on the location, composition, and size of economic activity. 

The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body. Also, the views and opinions expressed do not necessarily reflect the views of The Indiana Citizen or any other affiliated organization.