Slicing the Pie: Quantifying the Aggregate and Distributional Effects of Trade

University Of California-Berkeley, Berkeley CA

Investigators

Abstract

This project develops and applies a framework to measure the impact of international trade on a nation's economy. This includes not just measures of the total impact, but also measurements of the distributional and employment effects of international trade. The framework does not require data from trade reforms, so it can be used to understand the changes of proposed trade reforms; this is an advance over the current methods, which can evaluate the effects of past trade reform but are not as useful for predicting future outcomes. The project will result in a quantitative method for predict how changes in international trade flows affect employment and how the benefits and costs of increased trade affect different kinds of workers. As a result, the project contributes in an innovative way to our scientific evidence about whether or not increased international trade flows reduce or exacerbate economic inequality between citizens of the same country. As a result, the project contributes directly to better public policy and will help to improve the competitiveness of the US economy. This project includes a novel general-equilibrium analysis of world trade and labor markets that yields new insights into the quantification of both the aggregate gains from trade, their distribution, and the connection with manufacturing employment. The key theoretical innovation is to extend the multi-sector gravity model of trade to allow for heterogeneity in worker ability across sectors, with systematic differences across groups of ex-ante identical workers. As in the Roy model, workers select into sectors based on comparative advantage. The model serves as a natural generalization of the benchmark specific-factors model for analyzing the distributional labor market consequences of trade. The model allows for alternative definitions of groups based on characteristics such as education, age, and gender, thus enabling the study of the distributional consequences of trade along different dimensions of interest in a simple and transparent quantitative framework. When groups are defined along a geographical basis,the model can be shown to provide a theoretical foundation for recent work on the differential effect of trade across regions within countries (e.g., Autor, Dorn, and Hanson, 2013). The baseline model is flexible enough that it can be easily extended along several dimensions that make the quantitative results more compelling while also providing implications for the effects of shocks (such as the raise of China) on manufacturing employment, a question that has received considerable recent attention. In particular, the extended model can be used to shed light on the quantitative role of fiscal transfers (e.g., disability insurance) and trade imbalances across regions in affecting the way in which a trade shock is absorbed through changes in wages and employment. This project's flexible framework of the aggregate and distributional consequences of trade can be employed to analyze the impact of a broad set of trade-reforms, such as NAFTA, or possible trans-Atlantic or trans-Pacific liberalizations, across multiple countries