Working Paper: NBER ID: w11255
Authors: Tom Krebs; Pravin Krishna; William Maloney
Abstract: 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, 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.
Keywords: Trade Policy; Income Risk; Welfare; Dynamic Incomplete Markets; Mexico
JEL Codes: F13; F16; D52; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade policy changes (F13) | income risk (G52) |
| tariff reduction of 5% (F13) | standard deviation of persistent income shocks (C46) |
| 10% tariff level and 5% GDP growth rate reduction (F62) | standard deviation of persistent income shocks (C46) |
| 5% tariff rate and 5% GDP growth rate reduction (F62) | income risk (G52) |
| increase in income risk (E25) | decrease in lifetime consumption (D15) |
| tariff reductions (F13) | decrease in individual income risk during economic booms (E32) |