Poverty and Income Distribution Under Different Factor Market Assumptions: A Macro-Micro Model

The effect of trade liberalization on poverty and income distribution has long been a hotly debated topic. The approaches to analyze this important issue include a variety of methodologies, from general equilibrium modeling, to econometrics, to case analysis. Due to the central importance of the labor market for poverty results in developing countries, this paper tries to better represent the labor market both through householdlevel modeling and also through better factor market assumptions at the macro level. This paper combines a Computable General Equilibrium (CGE) macro model of Argentina with an econometric microsimulation model of household income generation. It examines the effects of a generalized trade liberalization scenario on poverty and income distribution under six different labor and capital market assumptions. The movement of individual workers across economic sectors and their wages are determined by personal characteristics in a sectoral choice and a wage regression model, respectively. The results show that the factor market assumptions do have an effect on the simulated poverty results. Assumptions of full employment, as most commonly used in many CGE analyses, result in negative poverty effects for the poorest. A growing economic sector can only increase its number of workers by pulling them from other productive sectors leading to smaller allocative improvements relative to a potentially negative terms-of-trade effect. More realistic scenarios that allow unemployment of labor, on the other hand, and simulate the effects of fixed nominal versus real wages, show that trade liberalization can lead to positive results for poverty, extreme poverty, and household income distribution. Although wage inequality increases some in this case, the overall results point to the benefits to the Argentine economy of domestic and worldwide trade liberalization.