Over the last 40 years, trade barriers around the world have fallen to historically low levels. As part of this process, many developing countries abandoned import substituting industrialization policies by sharply lowering trade barriers, motivating a large literature examining the effects of trade liberalization on various national labor market outcomes such as poverty and inequality.1 The focus on national out- comes follows the approach of classical trade theory, which takes the country as the geographic unit of analysis. A small but growing literature takes a different approach, examining the effects of trade liberalization on labor market outcomes at the subnational level. The papers in this literature measure the local effect of liberalization using a weighted average of changes in trade policy, with weights based on the industrial distribution of labor in each region.2 In this article, I develop a specific-factors model of regional economies that yields a very similar weighted- average relationship between regional wage changes and liberalization-induced price changes across industries. The model provides a theoretical foundation for this intu- itively appealing empirical approach and provides guidance on important choices faced by researchers when constructing regional measures of trade liberalization.
The model shows that liberalization in a particular industry will have a larger effect on local wages when (i) liberalization has a larger effect on the prices faced by producers, (ii) the industry accounts for a larger share of local employment, and (iii) labor demand in the industry is more elastic.3 The model also incorporates the nontraded sector, showing that nontraded prices move with traded goods prices dur- ing liberalization. This finding supports omitting the nontraded sector from the local weighted average and suggests that an alternative approach implicitly assuming that
Over the last 40 years, trade barriers around the world have fallen to historically low levels. As part of this process, many developing countries abandoned import substituting industrialization policies by sharply lowering trade barriers, motivating a large literature examining the effects of trade liberalization on various national labor market outcomes such as poverty and inequality.1 The focus on national out- comes follows the approach of classical trade theory, which takes the country as the geographic unit of analysis. A small but growing literature takes a different approach, examining the effects of trade liberalization on labor market outcomes at the subnational level. The papers in this literature measure the local effect of liberalization using a weighted average of changes in trade policy, with weights based on the industrial distribution of labor in each region.2 In this article, I develop a specific-factors model of regional economies that yields a very similar weighted- average relationship between regional wage changes and liberalization-induced price changes across industries. The model provides a theoretical foundation for this intu- itively appealing empirical approach and provides guidance on important choices faced by researchers when constructing regional measures of trade liberalization.The model shows that liberalization in a particular industry will have a larger effect on local wages when (i) liberalization has a larger effect on the prices faced by producers, (ii) the industry accounts for a larger share of local employment, and (iii) labor demand in the industry is more elastic.3 The model also incorporates the nontraded sector, showing that nontraded prices move with traded goods prices dur- ing liberalization. This finding supports omitting the nontraded sector from the local weighted average and suggests that an alternative approach implicitly assuming that
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