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Trade Policy, Income Risk and Welfare

  • Tom Krebs
  • Pravin Krishna

    ()

    (Department of Economics Brown University)

This paper studies empirically the relationship between trade policy and individual income risk faced by workers, and uses the estimates of this empirical analysis to evaluate the welfare effect of trade reform. The analysis proceeds in three steps. First, longitudinal data on workers are used to estimate time-varying individual income risk parameters in various manufacturing sectors. Second, the estimated income risk parameters and data on trade barriers are used to analyze the relationship between trade policy and income risk. Finally, a simple dynamic incomplete-market model is used to assess the corresponding welfare costs. In the implementation of this methodology using Mexican data, the paper finds that trade policy changes have a significant short run effect on income risk. Further, whilethe tariff level has an insignificant mean effect, it nevertheless changes the degree to which macroeconomic shocks affect income risk.

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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 271.

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Date of creation: 2005
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Handle: RePEc:red:sed005:271
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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