A recent trade brawl -- in which the U.S. retaliated with quotas to a surge in Chinese garment imports -- highlights the temptation for governments worldwide to intervene in the economy, especially when jobs hang in the balance.

But economies would be best served if politicians left labor markets alone, contends Arthur Blakemore, professor and chairman of the department of economics at the W. P. Carey School of Business. Blakemore has studied the links between labor force flexibility and economic growth.

"There's a reluctance to let the textile industry lose," said Blakemore, speaking at the Sino U.S. New Market Economy Forum held recently in Beijing. "But the loss is almost inevitable, and protecting that industry prevents the inevitable outcome and delays the proper reallocation of labor."

In the interests of long-term efficiency, he says governments should allow "creative destruction" of jobs, evoking the term coined by economist Joseph Schumpeter.

Labor market transformations can be a messy process, acknowledges Blakemore. "If you look at the U.S. economy as an observer, it looks very stable and secure. It doesn't seem like there's a lot of chaotic movement. But if you look deeper, there's a huge amount of turmoil reflected in the job turnover statistics," he says, noting the frequency with which U.S. workers start careers in new industries and job-hop among companies.

Notwithstanding the current flap over textiles, the U.S. can still claim a highly flexible labor market -- a factor that has contributed to its strong growth over time. In that sense, it could serve as a model as China seeks to minimize the government's role in guiding the economy.

Whatever course China chooses, its labor market policies will doubtless guide the course of its economic development. Labor is one of the most important resources a country has, accounting for about two thirds of output, says Blakemore. Research shows that most of the difference in international living standards is due to the degree of efficiency with which a given country's resources are used.

Already, China's shifting labor patterns are mirroring changes that occurred in the U.S. when it shifted from an agriculture-based economy to one based on services and industry.

In the early 1900s, most American workers drew their paychecks from the agricultural sector. But by 1950, when the U.S. had established itself as the world's leading economy, agriculture accounted for only 12.7 percent of employment. More than half of U.S. workers were in the services sector, while just over a third were in industry.

Sixty years later, the movement towards more highly competitive industries has accelerated. A mere 2.6 percent of Americans workers earn their living from agriculture, while three-quarters are in service jobs. The percentage of the labor force in the industrial sector has fallen to 23 percent.

China has begun to see similar trends, as its agricultural work force shrinks and laborers flood into cities seeking better jobs in construction and manufacturing. Other Asian precedents underscore the benefits of allowing such labor market shifts to take place -- and the risks of trying to prevent them.

China in 1990 looked a lot like South Korea in 1950, notes Blakemore. Since then South Korea has undergone a sweeping labor reallocation as workers have moved out of agriculture into industrial and service industries, helping transform it into an industrial powerhouse.

Japan, where politicians have long sought to protect farmers, offers a different historical example. Between 1920 and 1950 the employment share in agriculture fell only slightly, from 56 percent to 53 percent. The nation's static labor market was a huge drag on efficiency. Economists Fumio Hayashi of the University of Tokyo and W. P. Carey economics professor Edward C. Prescott have estimated that Japan's productivity would have soared 50 percent if it had allowed the optimal amount of labor force reallocation.

But sector-level changes are only one facet of labor market shifts. In fact, some of the most important transformations take place at the level of individual companies.

Research shows that almost half the annual productivity growth in the U.S. is accounted for not by broad sector changes, but by the movement of labor from less productive to more efficient firms. Every year in the U.S., more than one in ten jobs is created and more than one in ten is destroyed.

"Firm-level productivity differences become a driving force in reallocation, as markets develop. If governments want to allow markets to allocate resources, companies must be allowed to fail," says Blakemore. "Allowing firms to fail is the hard part. Politicians don't like firms in their constituency to fail. But it's part of the creative destruction process."

Another feature of open labor markets is the existence of big disparities in wages. But that only serves as an incentive for workers to seek jobs in higher-paying industries, says Blakemore. "The difference between highly-educated, experienced workers and others sends a signal to people to get training and move to a new sector," he says.

Countries with the most flexible labor markets tend to enjoy relatively low unemployment rates; the converse is also true, as can be seen in a comparison between the U.S. and continental Europe.

With a rigid labor market that makes it difficult to fire workers and expensive to hire new ones, Germany has "constructed barriers that you can think of as disruptive destruction," says Blakemore, noting that the U.S. sees 1.5 times as much labor force movement as in Europe.

"Creative destruction doesn't always feel right, but it is efficient. And through it, real living standards of all workers improve," he says.

If China wants to free up its labor force, it must recognize "there are winners and losers in this process," says Blakemore. "For the losers, the destruction causes great difficulty sometimes. But it's much better to reduce the duration of losses than to legislate against such losses. Almost always the losses are inevitable."