Michael Abbott [email protected] The Impacts of Integration and Trade on Labor Markets: Methodological Challenges and Consensus Findings in the NAFTA Context

Michael Abbott [email protected]

The Impacts of Integration and Trade on Labor Markets:

Methodological Challenges and Consensus Findings in the NAFTA Context

Michael Abbott

Labor Economist

Commission for Labor Cooperation

Washington, DC

May 11, 2004


Presentation Agenda:

• Methodologies used in this literature• Non-methodological limitations and complexities• Pre- and post-NAFTA research findings (trade,

employment, wages and income inequality effects)

• Lessons for developing countries in the study of trade liberalizing effects


Methodologies

Pre-NAFTA Studies(Forecasting)

1. Linked Macro-economic Models (LMMs)

2. Computable General Equilibrium Models (CGE models)

Post-NAFTA Studies(Evaluation Methods)

1. Partial Equilibrium Models

2. Qualitative/ Quantitative Methods


Linked Macro-economic Models (LMMs)

• Forecasting of aggregate economic activity• Rely upon historical data relationships from estimated

equations and parameter estimates• Effect: difference between the baseline and revised (with

policy change) forecast• Two models are linked together• Allows for simultaneous effect forecasts


Computable General Equilibrium (CGE) Models

• Allow for isolation of direct and indirect effects of a policy• Simulate relationships (interactions) between all sectors

of the economy; specific sectors and industries can be analyzed

• Allow for assumptions regarding economic behavior• Sensitivity analysis to gauge robustness of results on

parameter estimates• A lot of variation and specificity between individual CGE

models


Partial Equilibrium Analysis

• Estimate effects of a policy on one or more variables by holding others constant

• High degree of flexibility of analysis• Regression analysis is very prevalent• Tend to focus on one or a small number of variables;

interactions not usually tested• Allow for tests “of” a policy, rather than “since” a policy


Qualitative/Quantitative Methods

• Not confined to purely statistical relationships between variables

• Quantitative reasoning of secondary research is common• Allows for a large breadth of analysis• Can capture numerous effects of a policy• Causal relations are not definitively proven; effective for

“since” NAFTA effects


Non-methodological Limitations and Challenges

• Evaluation difficult due to recency of policy (i.e. NAFTA)• Data comparability problems• Constructing a controlled experiment in a social science

setting – extraneous variables and surprise “shocks”• Ascribing trade liberalizing success or failure to individual,

or a small number of, indicators• Research tends to focus on one country rather than “all”

NAFTA-countries


NAFTA Effects on Trade

• Pre-NAFTA consensus: net trade creating, with Mexico showing the most significant gains. Trade diversion a strong possibility

• Post-NAFTA results:

1. Increased exports from Mexico to the U.S.

2. Small increase in exports from Canada to the U.S.

3. Minimal effect on U.S. trade (exports and overall)• Trade diversion evidence is mixed – occurs in some

sectors, but not in others


NAFTA Effects on Employment

• Pre-NAFTA consensus: no consensus for the U.S. and Canada; generally assumed that employment would increase at least moderately in Mexico

• Post-NAFTA results: no consensus• Results tended to depend upon the various inputs added

and the assumptions factored into the models• Disentangling “of” from “since” –NAFTA employment

effects is difficult


NAFTA Effects on Wages and Income Inequality

• Pre-NAFTA consensus: no real consensus – small effects on wages for the U.S.

• Post-NAFTA results: most studies are qualitative/quantitative

1. No real evidence of wage increases specifically due to NAFTA – product prices used to infer effect of trade on wages

2. Income inequality has increased, but has not been directly attributed to NAFTA in econometric studies

• Lack of three-country analysis on these topics


Lessons for Developing Countries Studying Trade Liberalization Effects

• Larger and more trade “open” countries tend to be less affected by a single agreement

• There is no consensus in the economics community on a “best fit” methodology

• Determining the proper methodology depends upon the study’s goal (i.e. forecasting or evaluation) and the availability and comparability of data


General Factors that Affect Results

• Data comparability• Assumptions that are built into the original model• Generalized causal statements regarding effects “of”

NAFTA versus effects “since” NAFTA can be specious• The appropriate elapsed time from a policy change to

determining its effects is debatable


Checklist Prior to Conducting Research

• Ensure that data is comparable and accurate – a reliable statistics agency is essential

• The presence of extraneous variables must be accepted• External “shocks” will affect forecasts and results• Know what it is you are asking for!

Documents

Michael Abbott [email protected] The Impacts of Integration and Trade on Labor Markets: Methodological Challenges and Consensus Findings in the NAFTA Context