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GTAP Resource #1976

"What is the Role of Labor Markets in Making Trade Reforms Pro-Poor in Latin America"
by Bussolo, Maurizio and Denis Medvedev


Abstract
Trade liberalization may be a powerful policy in the fight against poverty in Latin America. According to our numerical simulations, a complete multilateral liberalization would free 2.7 million individuals of poverty, and a Free Trade Areas of the Americas would lift about the same number out of poverty. With few exceptions, tariff abatement helps the rural workers, one of the poorest groups, and increases demand and wages for factors of production owned by the poor. By reducing inequality, increased trade integration makes the growth process more pro-poor. However, the results vary significantly by country?while in Brazil and Chile the main beneficiaries of trade are the poor in agriculture, in Mexico the income gains are biased towards the non-farm workers. These differences are explained by the economic structure and the pattern of protection exhibited by each country, with the most heavily protected sectors experiencing a post-liberalization decline in incomes.

Since the relationship between trade and poverty is multifaceted, we have chosen to concentrate on a specific channel of transmission of trade-induced shocks to the income distribution?the labor market. The most important finding is the critical role that labor market flexibility plays in determining the pro-poor potential of trade reform. In contrast to a low labor mobility scenario, allowing individuals to switch sectors of employment in response to trade shocks significantly enhances poverty reduction and, in the case of Mexico, even switches the nature of reform from anti-poor to pro-poor.

Decomposition analysis reveals that the physical movement of people across sectors (after accounting for price effects) is responsible for a significant share of the additional poverty reduction experienced in the high labor mobility scenarios.

Ex-post evidence for Latin America shows evidence of low labor mobility, partly due to the extensive regulations of the region?s labor markets. In light of this, we analyze the data in household surveys for Brazil, Chile, Colombia, and Mexico to confirm that labor market segmentation is indeed an important feature of LAC labor markets, and that the persistence of inter-sectoral wage premia has significant implications for both poverty and inequality. We show that sectoral affiliation of a household head or other income-earning members of the household is a significant determinant of the probability of being poor.

Furthermore, inter-sectoral wage differentials are significant, large, and persistent?indicating low labor mobility. Using a two-stage estimating procedure, we also link sectoral wage premia to trade policy variables, reaffirming the importance of labor market flexibility for poverty reduction.

The policy significance of these findings lies in the fact that while various trade liberalization scenarios in Latin America can indeed be poverty-reducing, labor market flexibility is a key determinant of this result.

At the same time, regression results confirm that LAC labor markets remain segmented and that persistent inter-sectoral wage differentials are related to trade policy. This confirms the importance of flexible and efficient labor markets as a crucial component of pro-poor trade reform.


Resource Details (Export Citation) GTAP Keywords
Category: 2006 Conference Paper
Status: Published
By/In: Presented at the 9th Annual Conference on Global Economic Analysis, Addis Ababa, Ethiopia
Date: 2006
Version:
Created: Medvedev, D. (4/25/2006)
Updated: Medvedev, D. (4/25/2006)
Visits: 1,719
No keywords have been specified.


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