Agro-manufactured export prices, wages and unemployment.

Agricultural policies in developed countries, such as tariff protection, nontariff barriers, export subsidies, and income support policies, are likely to have significant effects on poverty in the developing world. In low income countries, for example, agricultural policies that affect the international prices of major cash crops will have impacts on income, crop choices, and consumption. In contrast, middle income countries with a more developed industrial sector will most likely be affected through labor markets via prices in the agro-industrial sector. More concretely, changes in agro-manufactured export prices will induce a reallocation of factors of production, changes in relative factor demands, and changes in relative factor prices (wages). If there are frictions in the economy and wages are not fully flexible, there may be changes in unemployment as well: employed workers may lose their jobs, unemployed workers may become employed, and inactive workers may enter the workforce. These changes in the employment status of individual workers may comprise discrete changes in labor income and thus in household welfare.

There is a vast literature that has studied farm responses to trade in low income countries. (1) There is also a vast literature that has looked at labor markets and wages. (2) Fewer papers, however, have investigated the link between trade and labor market responses with adjustment costs, endogenous labor supply, and unemployment) While most research on this topic has focused on developed countries, my main objective here is to provide evidence on labor market adjustment to trade shocks in middle income, developing countries. (4) I explore the case of Argentina, a country well-endowed in natural resources and with a comparative advantage in agro-manufacturing--the major export sector. In addition, the unemployment rate in Argentina during the last decade was always greater than 10%, making this experience a great case study to investigate the impacts of agro-manufactured exports in the presence of adjustment costs in labor markets.

I set up a maximum likelihood model of trade, wages and unemployment. Based on their market and reservation wages, workers decide whether to be active (i.e., to participate in the labor market) or inactive. Firms make job offers to active workers; workers who receive an offer are employed and those who do not become unemployed. Thus, there are three regression functions in my model: a wage equation, a reservation wage equation, and a job offer equation.

I capture the role of trade with the international price of agro-manufactured exports and I make both wages and job offers a function of these prices. To estimate the model, I combine labor force data on wages, employment, and unemployment at an individual level with export and import price data at an aggregate level. The method takes advantage of the time variability in prices and the time variability of household surveys to identify the parameters of the model. Similar methods have been utilized by Deaton (1997), Goldberg and Tracy (2003), Porto (2006), Ravallion (1990), and Wolak (1996).

The maximum likelihood model estimates parameters that measure how market wages, reservation wages, and job offers react to a change in the prices of agro-manufactured exports. These parameter estimates can be used to predict the probability of actively participating in the labor market, the probability of getting a job offer, and the probability of employment and unemployment. In addition, the estimated regression function for wages can be used to predict expected wages. Armed with these estimates, I investigate the impacts of higher export prices of agro-industrial products, possibly due to episodes of trade liberalization in the developed world.

My results indicate that Argentina would significantly benefit from higher prices of agro-manufactured exports. These higher prices would trigger job openings, raise employment probabilities and raise wages. By increasing the market wage relative to the reservation wage, labor market participation would increase as well. In the end, following a 10% increase in the price of agro-manufactured exports, I estimate an increase in the employment probability of 1.36 percentage points, on average. The unemployment rate would decline by 1.23 percentage points, which is roughly equivalent to 10% of the Argentine unemployment rate in 1998. Expected wages would increase by 10.39% due to higher market wages, on the one hand, and higher employment probabilities, on the other. A key finding is that the increase in employment opportunities accounts for more than 70% of the increase in expected wages. These results thus highlight the importance of allowing for labor market adjustments to trade reforms in empirical work and suggest that failure to account for these adjustment effects will bias the estimates of the welfare impacts of trade policy. (5)

A Model of Trade, Wages and Unemployment

International trade cannot by itself be the cause of unemployment, which instead arises when there are frictions in the economy. Models of unemployment typically include minimum wages, efficiency wages, search costs and matching, and credit and liquidity constraints. Theoretical models of trade and unemployment with minimum wages include Brecher (1974) and Davis (1996). Albert and Meckl (2001) study trade in the presence of efficiency-wage unemployment. Davidson, Martin, and Matusz (1999) explore instead trade and search-generated unemployment. Finally, Leamer (1980) and Baldwin, Mutti, and Richardson (1980) introduce models of unemployment generated during the transition that follows a trade reform when there are costs of adjustment.

In all these scenarios, trade can interact with the inherent frictions in the economy to exacerbate the incidence of trade costs or to boost the gains from trade. For example, when new export opportunities arise, unemployed individuals may become employed in the export sector, thus significantly benefiting from trade. In contrast, frictions may prevent the absorption of job losses in the import competing sectors in the face of stronger competition from abroad. If there are labor supply responses, additional effects will arise in equilibrium because the conditions in international markets can affect total labor supply and equilibrium unemployment.

Figure 1 provides an overview of the mechanisms. The graph depicts a simple two-sector (a and m) specific factor model (land and capital, for instance). Labor is mobile across sectors. The length of the box measures the total labor supply, and the downward sloping curves represent labor demand (the value of its marginal productivity): [Vp.sub.a] is the labor demand in the export sector (say, agro-manufactures) and [Vp.sub.m], the labor demand in the m sector. Because of the frictions mentioned above, the equilibrium wage [bar.w] is above the competitive wage so that the labor market does not clear completely and there is unemployment, U = L([p.sub.a], [p.sub.m]) - [L.sub.a] - [L.sub.m]. (6)

[FIGURE 1 OMITTED]

In figure 1, the impacts of trade can be assessed by considering an increase in the price of agro-manufactured exports, [p.sub.a]. Although I do not model the price changes explicitly, export prices for Argentine products like dairy, oils and fats, mills products and beef--goods that form the bulk of manufactured exports of the country--may increase due to trade liberalization in developed countries. These countries intervene in world markets with an extensive set of tariffs, nontariff barriers, and subsidies and it is feasible to think that the elimination of (some of) these barriers will bring about increases in export prices. The increase in [p.sub.a] raises labor demand in the agro-industrial sector. This is captured by an outward shift in the demand curve to [Vp'.sub.a]. In addition, there may be a change in the market wage, say to [bar.w]'. Finally, there may a change in total labor supply, say to L'. The impact of a higher [p.sub.a] on unemployment is thus ambiguous. The initial shift in labor demand tends to reduce unemployment, but higher wages cause firms to move backwards along the labor demand curves, thus reducing employment. Finally, higher wages lead to more participation and higher unemployment (ceteris paribus).

In the remainder of this section, I develop an empirical model of trade, unemployment and labor supply that captures these features. My goal is to estimate the model using Argentine household survey data. I do not attempt to identify any of the theoretical models of trade and unemployment. Rather, I am interested in exploring the impacts of higher export prices of agro-manufacture exports when labor markets in developing countries are not fully flexible. In other words, this article is an attempt at measuring the potential benefits (and costs) of enhanced export opportunities in a context without full wage adjustment.

My empirical model is conceptually simple. Firms maximize profits and demand labor. Workers maximize utility and supply labor. As explained above, unemployment is assumed to be generated by some frictions present in the economy.