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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

presentation agenda
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
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

linked macro economic models lmms
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
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
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
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
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
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
nafta effects on employment
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
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
lessons for developing countries studying trade liberalization effects
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
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
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!