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Trade Liberalization And Compensation

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  • Carl Davidson
  • Steven J. Matusz

Abstract

Liberalization harms some groups while generating aggregate benefits. We consider various labor market policies that might be used to compensate those who lose from freer trade. Our goal is to find the policy that compensates each group of losers at the lowest cost to the economy. We argue that wage subsidies should be used to compensate those who bear the adjustment costs triggered by liberalization whereas employment subsidies should be used to compensate those who remain trapped in the previously protected sector. Our analysis indicates that the cost of compensation is low, provided that the right policy is used. Copyright 2006 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 47 (2006)
Issue (Month): 3 (08)
Pages: 723-747

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Handle: RePEc:ier:iecrev:v:47:y:2006:i:3:p:723-747

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  1. Richard Brecher & Eshan Choudhri, 1991. "Pareto Gains from Trade, Reconsidered: Compensating for Job Lost," Carleton Economic Papers 91-16, Carleton University, Department of Economics, revised May 1994.
  2. Brander, James A. & Spencer, Barbara J., 1994. "Trade adjustment assistance : Welfare and incentive effects of payments to displaced workers," Journal of International Economics, Elsevier, vol. 36(3-4), pages 239-261, May.
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