Working Paper: NBER ID: w8995
Authors: Kala Krishna; Cemile Yavas
Abstract: This paper argues that labor market distortions in transition and developing economies help explain differential impacts of trade liberalization. We assume that workers differ in ability. In a market economy their earnings depend on their ability. However, earnings are independent of ability due to a common wage set in manufacturing in a transition economy and because of family farms in a developing economy. Our work suggests that trade liberalization without structural reform can have serious adverse effects in transition and developing economies: there can even be mutual losses from trade.
Keywords: No keywords provided
JEL Codes: F16; O17; P23; P33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade liberalization (F13) | Social welfare (market economies) (I38) |
| Trade liberalization (F13) | Social welfare (transition economies) (P36) |
| Common wage (J31) | Social welfare (transition economies) (P36) |
| Low productivity workers attracted to indivisible goods sectors (J29) | Higher production costs (D24) |
| Higher production costs (D24) | Lower social welfare (D69) |
| Trade liberalization (F13) | Average quality of labor (developing economies) (J24) |
| Trade liberalization (F13) | Earnings (developing economies) (O10) |
| Trade liberalization (F13) | Ability to afford goods (developing economies) (D12) |
| Indivisible goods exports from developing to transition economies (F14) | Mutual losses from trade (F14) |