Trade Policy, Income Risk, and Welfare, Issue 11255
National Bureau of Economic Research, 2005 - Commercial policy - 41 pages
"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, we find that trade policy changes have a significant short run effect on income risk. Further, while the tariff level has an insignificant mean effect, it nevertheless changes the degree to which macroeconomic shocks affect income risk"--National Bureau of Economic Research web site.
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average Carroll and Samwick change in income coefficient compensating variation component of income Constantinides and Duffie correlation corresponding welfare costs econometric economy effect of trade endogenous ENEU Estimation bias Euler equation Gourinchas and Parker heteroscedasticity household import penetration income changes income parameters income process income risk parameters income volatility incomplete markets increase in income individual income risk Krebs labor income risk level on income lifetime consumption log-normal distributions log(l macroeconomic manufacturing sectors mean effect Meghir and Pistaferri Mexican Mexico panel dimension paper percent of lifetime period permanent component permanent income shocks persistent income shocks Pistaferri 2004 policy and income quarters random walk relationship between trade risk aversion sample selection bias short-run effect specifically standard error Storesletten tariff changes tariff level tariff rate tariff reduction Telmer and Yaron trade barriers trade liberalization trade policy changes trade reform transitory shocks variance wage welfare analysis Welfare Change welfare effects welfare results