Ex-Ante Evaluation of Sub-National Labor Market Impacts of Trade Reforms

A macro-micro simulation framework that links a computable general equilibrium model with the survey-based global income distribution dynamics model can be used to assess the economic and distributional effects of macroeconomic shocks and policies. The methodology is used to assess the economic and subnational labor market impacts of a series of stylized trade policy options for the Sri Lankan economy over a 10-year time period. The analysis focuses on the impact of unilateral para-tariff liberalization, free-trade agreements with China or India, and a full-reform scenario. The simulation results show that more ambitious trade reform can result in larger gains in gross domestic product, poverty reduction, and exports, particularly in sectors employing a higher proportion of women. In the absence of additional policies, growth is not equally distributed. In all the scenarios in which the Sri Lankan economy grows, the distribution of gains is regressive. Increasing labor demand for skilled workers translates into a larger skilled wage premium -- by as much as 1.1 percent with respect to the baseline. Implementation of full trade reform accelerates the concentration of economic activity in the western regions of Colombo, Gampaha, and Kalutara. Net employment gains in the western regions would increase from 111,000 to 136,000 in the full reform scenario by 2028 and with respect to baseline conditions.