Publication: Trade Policy, Income Risk, and Welfare
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Published
2010
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00346535
Date
2012-03-30
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This paper develops a framework to study empirically the relationship between trade policy and individual income risk and to evaluate the associated welfare consequences. 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, we find 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.
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Publication Trade Policy, Income Risk, and Welfare(World Bank, Washington, DC, 2005-06)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.Publication Human Capital, Trade Liberalization, and Income Risk(World Bank, Washington, DC, 2007-07)Using data from Mexico, the authors study empirically the link between trade policy and individual income risk and the extent to which this varies across workers of different human capital (education) levels. They use longitudinal income data on workers to estimate time-varying individual income risk parameters in different manufacturing sectors in Mexico between 1987 and 1998, a period in which the Mexican economy experienced substantial changes in trade policy. In a second step, they use the variations in trade policy across different sectors and over time to estimate the link between trade policy and income risk for workers of varying education levels. The authors' findings are as follows. The level of openness of an economy is not found to be related to income risk for workers of any type. Furthermore, changes in trade policy (that is, trade policy reforms) are not found to have any effect on the risk to income faced by workers with either low or high levels of human capital. But workers with intermediate levels of human capital are found to experience a statistically and economically significant increase in income risk immediately following liberalization of trade. The findings thus point to an interesting non-monotonicity in the interaction between human capital, income risk and trade policy changes.Publication Income Risk, Income Mobility and Welfare(World Bank, Washington, DC, 2012-10)This paper develops a framework for the quantitative analysis of individual income dynamics, mobility and welfare. Individual income is assumed to follow a stochastic process with two (unobserved) components, component representing measurement error or transitory income shocks and an Autoregressive (AR(1)) component representing persistent changes in income. The analysis uses a tractable consumption-saving model with labor income risk and incomplete markets to relate income dynamics to consumption and welfare, and derive analytical expressions for income mobility and welfare as a function of the various parameters of the underlying income process. The empirical application of the framework using data on individual incomes from Mexico provides striking results. Much of measured income mobility is driven by measurement error or transitory income shocks and therefore (almost) welfare-neutral. A smaller part of measured income mobility is due to either welfare-reducing income risk or welfare-enhancing catching-up of low-income individuals with high-income individuals, both of which have economically significant effects on social welfare. Decomposing mobility into its fundamental components is thus seen to be crucial from the standpoint of welfare evaluation.Publication Income Mobility, Income Risk, and Welfare(Published by Oxford University Press on behalf of the World Bank, 2019-06)This paper presents a framework for the quantitative analysis of individual income dynamics, mobility, and welfare, with ex ante identical individuals facing a stochastic income process and market incompleteness, implying that they are unable to insure against persistent shocks to income. We show how the parameters of the income process can be estimated using repeated cross-sectional data with a short panel dimension and use a simple consumption-saving model for quantitative analysis of mobility and welfare. Our empirical application, using data on individual incomes from Mexico, provides striking results. Most of the measured income mobility is driven by measurement error or transitory income shocks and is therefore (almost) welfare neutral. Only a small part of measured income mobility is due to either welfare-reducing income risk or welfare-enhancing catching-up of low-income individuals with high-income individuals, both of which, nevertheless, have economically significant effects on social welfare. Strikingly, roughly half of the mobility that cannot be attributed to measurement error or transitory income shocks is driven by welfare-reducing persistent income shocks. Decomposing mobility into its fundamental components is thus crucial from the standpoint of welfare evaluation.Publication Does What You Export Matter? In Search of Empirical Guidance for Industrial Policies(Washington, DC: World Bank, 2012)Does the content of what economies export matter for development? And, if it does, can governments improve on the export basket that the market generates through the shaping of industrial policy? This book considers these questions by reviewing relevant literature and taking stock of what is known from conceptual, empirical, and policy viewpoints. A large literature answers affirmatively to the first question and suggests the characteristics that distinguish desirable exports. More prosaically, but no less controversially, goods which are intensive in unskilled labor are thought to promote 'pro-poor' or 'shared growth,' whereas those which are skilled-labor intensive are thought to generate positive externalities for society as a whole. Concerns about macroeconomic stability have led to a focus on the overall composition of the export basket. This book revisits many of these arguments conceptually and, wherever possible, imports heuristic approaches into frameworks where, as more familiar arguments, they can be held up to the light, rotated, and their facets examined for brilliance or flaws. Second, the book examines what emerges empirically as a basis for policy design. Specifically, given certain conceptual arguments in favor of public sector intervention, do available data and empirical methods allow for actually doing so with a high degree of confidence? In asking this question, the book assumes that policy makers are competent and seek to raise the welfare of their citizens. This assumption permits sidestepping the debate about whether government failures trump market failures generically: In this sense, the book attempts to 'give industrial policy a chance.'
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