Modeling the Impact of Trade Liberalization: A Structuralist Perspective?

This paper uses variants of the World Bank’s Linkage model to assess how labor market specification affects the results from global trade reform. The results of the standard version of the model have been widely disseminated and discussed. The standard version has a recursive dynamic structure, no scale economies, perfect competition and market clearing for all markets including labor. This paper (using a simple comparative static version of the model) focuses on differences in labor markets alone. It reports the results from four versions of the model. The first is the standard model with uniform wages, perfect labor mobility across sectors and full employment. In succession the paper looks at three cumulative variants. The first variant introduces a wedge between agricultural and non-agricultural wages. With perfect labor mobility, the wedge implies changes in aggregate productivity as labor moves to either lower or higher productivity sectors when global trade reform is implemented. The second variant introduces partial labor mobility between agricultural and non-agricultural sectors. The third allows for fixed real wages in the urban sector, generating unemployment if labor market conditions generate demand less than supply. All three assumptions have quite different implications for the allocation of gains/losses across developing countries, although fewer impacts on the structural outcomes such as changes to agricultural output or exports.