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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

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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

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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

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Pre-NAFTA Studies


Linked Macro-economic Models (LMMs)

Computable General Equilibrium Models (CGE models)

Post-NAFTA Studies

(Evaluation Methods)

Partial Equilibrium Models

Qualitative/ Quantitative Methods


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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

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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

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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

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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

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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

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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:

    • Increased exports from Mexico to the U.S.

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

    • Minimal effect on U.S. trade (exports and overall)

  • Trade diversion evidence is mixed – occurs in some sectors, but not in others

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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

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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

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

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

  • Lack of three-country analysis on these topics

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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

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General Factors that Affect Results Liberalization Effects

  • 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

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Checklist Prior to Conducting Research Liberalization Effects

  • 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!