Publication:
Trade Policy and Wage Inequality: A Structural Analysis with Occupational and Sectoral Mobility

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Date
2015-06-23
ISSN
0022-1996
Published
2015-06-23
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Abstract
A number of authors have argued that a worker's occupation of employment is at least as important as the worker's industry of employment in determining whether the worker will be hurt or helped by international trade. We investigate the role of occupational mobility on the effects of trade shocks on wage inequality in a dynamic, structural econometric model of worker adjustment. Each worker in our specification can switch either industry, occupation, or both, paying a time-varying cost to do so in a rational-expectations optimizing environment. We also specify a novel model of offshoring based on task-by-task comparative advantage that collapses to a very simple form for simulation. We find that the costs of switching industry and occupation are both high, and of similar magnitude. In simulations we find that a worker's industry of employment is much more important than either the worker's occupation or skill class in determining whether or not she is harmed by a trade shock, but occupation is crucial in determining who is harmed by an offshoring shock.
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Artuc, Erhan; McLaren, John. 2015. Trade Policy and Wage Inequality: A Structural Analysis with Occupational and Sectoral Mobility. © World Bank. http://hdl.handle.net/10986/22717 License: CC BY-NC-ND 3.0 IGO.
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  • Publication
    Trade Policy and Wage Inequality : A Structural Analysis with Occupational and Sectoral Mobility
    (World Bank, Washington, DC, 2012-09) Artuc, Erhan; McLaren, John
    A number of authors have argued that a worker's occupation of employment is at least as important as the worker's industry of employment in determining whether the worker will be hurt or helped by international trade. This paper investigates the role of occupational mobility on the effects of trade shocks on wage inequality in a dynamic, structural econometric model of worker adjustment. Each worker in the model can switch either industry, occupation, or both, paying a time-varying cost to do so in a rational-expectations optimizing environment. The authors find that the costs of switching industry and occupation are both high, and of similar magnitude, but in simulations they find that a worker's industry of employment is much more important than either the worker's occupation or skill class in determining whether he or she is harmed by a trade shock.
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    This paper studies a simple, tractable model of labor adjustment in a trade model that allows researchers to analyze the economy's dynamic response to trade liberalization. Since it is a neoclassical market-clearing model, duality techniques can be employed to study the equilibrium and, despite its simplicity, a rich variety of properties emerge. The model generates gross flows of labor across industries, even in the steady state; persistent wage differentials across industries; gradual adjustment to a liberalization; and anticipatory adjustment to a pre-announced liberalization. Pre-announcement induces anticipatory flight from the liberalizing sector, driving up wages there temporarily and giving workers remaining there what this paper calls "anticipation rents." By this process, pre-announcement makes liberalization less attractive to export-sector workers and more attractive to import-sector workers, eventually making workers unanimous either in favor of or in opposition to liberalization. Based on these results, the paper identifies many pitfalls to conventional methods of empirical study of trade liberalization that are based on static models.
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    Recent Perspectives on Trade and Inequality
    (World Bank, Washington, DC, 2011-08-01) Harrison, Ann; McLaren, John; McMillan, Margaret
    The 1990's dealt a blow to traditional Heckscher-Ohlin analysis of the relationship between trade and income inequality, as it became clear that rising inequality in low-income countries and other features of the data were inconsistent with that model. As a result, economists moved away from trade as a plausible explanation for rising income inequality. In recent years, however, a number of new mechanisms have been explored through which trade can affect(and usually increase) income inequality. These include within-industry effects due to heterogeneous?firms; effects of offshoring of tasks; effects on incomplete contracting; and effects of labor-market frictions. A number these mechanisms have received substantial empirical support.
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    The welfare effects of trade shocks turn on the nature and magnitude of the costs workers face in moving between sectors. Using an Euler-type equilibrium condition derived from a rational expectations model of dynamic labor adjustment, we estimate the mean and variance of workers' switching costs from the US CPS. We estimate high values of both parameters, implying slow adjustment of the economy and sharp movements in wages in response to trade shocks. However, import-competing workers can still benefit from tariff removal; liberalization lowers their wages in the short and long run but raises their option value.
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