1. Michael Abbott mabbott@naalc.org The Impacts of Integration and Trade on Labor Markets: Methodological Challenges and Consensus Findings in the NAFTA Context Michael Abbott Labor Economist Commission for Labor Cooperation Washington, DC May 11, 2004

2. Michael Abbott mabbott@naalc.org Presentation Agenda: Methodologies used in this literature Non-methodological limitations and complexities Pre- and post-NAFTA research findings (trade, employment, wages and income inequality effects) Lessons for developing countries in the study of trade liberalizing effects

3. Michael Abbott mabbott@naalc.org Methodologies Pre-NAFTA Studies (Forecasting) 1.Linked Macro-economic Models (LMMs) 2.Computable General Equilibrium Models (CGE models) Post-NAFTA Studies (Evaluation Methods) 1.Partial Equilibrium Models 2.Qualitative/ Quantitative Methods

4. Michael Abbott mabbott@naalc.org Linked Macro-economic Models (LMMs) Forecasting of aggregate economic activity Rely upon historical data relationships from estimated equations and parameter estimates Effect: difference between the baseline and revised (with policy change) forecast Two models are linked together Allows for simultaneous effect forecasts

5. Michael Abbott mabbott@naalc.org Computable General Equilibrium (CGE) Models Allow for isolation of direct and indirect effects of a policy Simulate relationships (interactions) between all sectors of the economy; specific sectors and industries can be analyzed Allow for assumptions regarding economic behavior Sensitivity analysis to gauge robustness of results on parameter estimates A lot of variation and specificity between individual CGE models

6. Michael Abbott mabbott@naalc.org Partial Equilibrium Analysis Estimate effects of a policy on one or more variables by holding others constant High degree of flexibility of analysis Regression analysis is very prevalent Tend to focus on one or a small number of variables; interactions not usually tested Allow for tests “of” a policy, rather than “since” a policy

7. Michael Abbott mabbott@naalc.org Qualitative/Quantitative Methods Not confined to purely statistical relationships between variables Quantitative reasoning of secondary research is common Allows for a large breadth of analysis Can capture numerous effects of a policy Causal relations are not definitively proven; effective for “since” NAFTA effects

8. Michael Abbott mabbott@naalc.org Non-methodological Limitations and Challenges Evaluation difficult due to recency of policy (i.e. NAFTA) Data comparability problems Constructing a controlled experiment in a social science setting – extraneous variables and surprise “shocks” Ascribing trade liberalizing success or failure to individual, or a small number of, indicators Research tends to focus on one country rather than “all” NAFTA-countries

9. Michael Abbott mabbott@naalc.org NAFTA Effects on Trade Pre-NAFTA consensus: net trade creating, with Mexico showing the most significant gains. Trade diversion a strong possibility Post-NAFTA results: 1.Increased exports from Mexico to the U.S. 2.Small increase in exports from Canada to the U.S. 3.Minimal effect on U.S. trade (exports and overall) Trade diversion evidence is mixed – occurs in some sectors, but not in others

10. Michael Abbott mabbott@naalc.org NAFTA Effects on Employment Pre-NAFTA consensus: no consensus for the U.S. and Canada; generally assumed that employment would increase at least moderately in Mexico Post-NAFTA results: no consensus Results tended to depend upon the various inputs added and the assumptions factored into the models Disentangling “of” from “since” –NAFTA employment effects is difficult

11. Michael Abbott mabbott@naalc.org NAFTA Effects on Wages and Income Inequality Pre-NAFTA consensus: no real consensus – small effects on wages for the U.S. Post-NAFTA results: most studies are qualitative/quantitative 1.No real evidence of wage increases specifically due to NAFTA – product prices used to infer effect of trade on wages 2.Income inequality has increased, but has not been directly attributed to NAFTA in econometric studies Lack of three-country analysis on these topics

12. Michael Abbott mabbott@naalc.org Lessons for Developing Countries Studying Trade Liberalization Effects Larger and more trade “open” countries tend to be less affected by a single agreement There is no consensus in the economics community on a “best fit” methodology Determining the proper methodology depends upon the study’s goal (i.e. forecasting or evaluation) and the availability and comparability of data

13. Michael Abbott mabbott@naalc.org General Factors that Affect Results Data comparability Assumptions that are built into the original model Generalized causal statements regarding effects “of” NAFTA versus effects “since” NAFTA can be specious The appropriate elapsed time from a policy change to determining its effects is debatable

14. Michael Abbott mabbott@naalc.org Checklist Prior to Conducting Research Ensure that data is comparable and accurate – a reliable statistics agency is essential The presence of extraneous variables must be accepted External “shocks” will affect forecasts and results Know what it is you are asking for!