The Impacts of Integration and Trade on Labor Markets: Methodological Challenges and Consensus Findings in the NAFTA Co

1. 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

2. 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

3. Pre-NAFTA Studies (Forecasting) Linked Macro-economic Models (LMMs) Computable General Equilibrium Models (CGE models) Post-NAFTA Studies (Evaluation Methods) Partial Equilibrium Models Qualitative/ Quantitative Methods Methodologies

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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!