Trade Policy, Income Risk, and Welfare

This paper studies empirically the relationship between trade policy and individual income risk faced by workers, and uses the estimates of this empirical analysis to evaluate the welfare effect of trade reform. The analysis proceeds in three steps. First, longitudinal data on workers are used to estimate time-varying individual income risk parameters in various manufacturing sectors. Second, the estimated income risk parameters and data on trade barriers are used to analyze the relationship between trade policy and income risk. Finally, a simple dynamic incomplete-market model is used to assess the corresponding welfare costs. In the implementation of this methodology using Mexican data, the paper finds that trade policy changes have a significant short run effect on income risk. Further, while the tariff level has an insignificant mean effect, it nevertheless changes the degree to which macroeconomic shocks affect income risk.

Bibliographic Details

Main Authors:	Krebs, Tom, Krishna, Pravin, Maloney, William
Language:	English
Published:	World Bank, Washington, DC 2005-06
Subjects:	ADJUSTMENT COSTS, AGGREGATE VOLATILITY, AUTOCOVARIANCE, BORDER TRADE, BUSINESS CYCLE, BUSINESS CYCLES, CAPITAL MARKET, CHANGES IN TRADE, CLOSED ECONOMY, DATA SET, DATA SETS, DEMAND ELASTICITY, DEPENDENT VARIABLE, DOWNWARD RIGIDITY OF WAGES, ECONOMETRIC ANALYSIS, ECONOMETRIC ISSUES, ECONOMIC GROWTH, ECONOMICS, ECONOMISTS, ELASTICITY, EMPIRICAL ANALYSIS, EMPIRICAL ESTIMATES, EMPIRICAL EVIDENCE, EMPIRICAL LITERATURE, EMPIRICAL RESULTS, EMPIRICAL STUDIES, EMPIRICAL WORK, EMPLOYMENT, ENDOGENOUS DETERMINATION, EQUILIBRIUM, EXCHANGE RATE, EXTENDED UNEMPLOYMENT, FOREIGN COMPETITION, FORMAL ANALYSIS, FUTURE RESEARCH, GDP, GENERAL EQUILIBRIUM MODEL, GROWTH RATE, HIGH INFLATION, HUMAN CAPITAL, IDIOSYNCRATIC SHOCKS, IMPACT OF TRADE, IMPACT OF TRADE LIBERALIZATION, IMPORT PENETRATION, INCOME, INCOME DATA, INCOME INEQUALITY, INCOME LEVELS, INCOME SHOCKS, INCOMPLETE MARKETS, INDIVIDUAL INCOMES, INFLATION, INFLATION RATES, INSURANCE, INSURANCE MARKETS, INTERNATIONAL PRODUCTION, JOB CREATION, LABOR DEMAND, LABOR DEMAND FUNCTIONS, LABOR FORCE, LABOR MARKET, LINEAR REGRESSION, LONGITUDINAL DATA, LOWERING TRADE BARRIERS, MACROECONOMIC CONDITIONS, MACROECONOMIC ENVIRONMENT, MACROECONOMIC FACTORS, MACROECONOMIC SHOCKS, MACROECONOMIC VARIABLES, MARKET LIBERALIZATION, MEAN VALUE, MEASUREMENT ERROR, OPEN ECONOMIES, OPENNESS, PERMANENT INCOME, POLICY CHANGE, POLICY CHANGES, POLICY REFORM, POLICY REFORMS, POLICY RESEARCH, POLITICAL ECONOMY, POSITIVE EFFECTS, PRESENT VALUE, PRODUCTIVITY, RANDOM WALK, REAL EXCHANGE RATE, REAL WAGE, REAL WAGES, REDUCTION IN TARIFFS, REGRESSION ANALYSIS, RESOURCE ALLOCATION, RISK AVERSION, SAVINGS, SELECTION BIAS, SERIAL CORRELATION, SERIAL DEPENDENCE, SIGNIFICANT RELATIONSHIP, TARIFF DATA, TARIFF RATE, TARIFF RATES, TARIFF REDUCTION, TARIFF REDUCTIONS, TECHNOLOGICAL PROGRESS, TRADE AGREEMENT, TRADE BARRIERS, TRADE LIBERALIZATION, TRADE LIBERALIZATION INCREASES, TRADE OPENNESS, TRADE PATTERNS, TRADE POLICY, TRADE REFORM, TRADE REFORMS, TRANSITORY SHOCKS, UNEMPLOYMENT, WAGE CHANGES, WAGE RATE, WAGE RATES, WAGES, WELFARE EFFECTS, WORKERS EXPERIENCE, WORLD PRICES,
Online Access:	http://documents.worldbank.org/curated/en/2005/06/6030533/trade-policy-income-risk-welfare https://hdl.handle.net/10986/8215
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