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Trade policy, income risk, and welfare

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  • Krebs, tom
  • Krishna, Pravin
  • Maloney, William

Abstract

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.

Suggested Citation

  • Krebs, tom & Krishna, Pravin & Maloney, William, 2005. "Trade policy, income risk, and welfare," Policy Research Working Paper Series 3622, The World Bank.
    • Handle: RePEc:wbk:wbrwps:3622
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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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