Labor Markets in Regional Trade Agreements: What Do We Know?

Globalization has failed to relax barriers to the movement of labor, especially unskilled workers. So have North-South Regional Trade Agreements (RTAs), while South-South RTAs have failed to implement good intentions. A literature review of the labor effects of RTAs underscores context specificity precluding generalizations across categories of RTAs. Most ex-ante studies have focused on global welfare effects rather than anticipated labor market effects while ex-post studies have had difficulty isolating any direct effects attributable to implementation of the RTA because of confounding effects as illustrated by a discussion of the wage puzzle in Mexico under NAFTA. The survey reviews labor market and wage results from ex-ante CGE estimates and ex-post household-based econometric estimates. A review of the response of manufacturing firms and plants to the large reductions in tariffs under CUSFTA, MERCOSUR, and NAFTA reveal significant adjustments. Under CUSTTA, in Canadian manufacturing short-run employment losses were large while productivity gains were equally large and the market access to the US led Canadian firms in the bottom of the distribution of labor productivity to engage in investment in technology upgrading. In MERCOSUR and NAFTA, an upgrading in technology was also observed among the firms that were led to enter (or to increase) their exports to RTA partners (Brazil for Argentine firms and the US for Mexican firms). These firms also increased their demand for skilled labor suggesting that the FTA contributed to an increase in the skill premium.