Packet - Economics - Johns Hopkins University

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REFERENCES Prathi Seneviratne Professor Pravin Krishna, Johns Hopkins University, School of Advanced International Studies e-mail: pravin krishna@jhu.edu, Phone: (202) 663-5733 Professor Robert A. Moffitt, Johns Hopkins University e-mail: moffitt@jhu.edu, Phone: (410) 516-7611 Professor Lawrence Ball, Johns Hopkins University e-mail: lball@jhu.edu, Phone: (410) 516-7605 Professor Louis J. Maccini (teaching), Johns Hopkins University e-mail: maccini@jhu.edu, Phone: (410) 516-7607
Essays on the Labor Market Impact of Trade Liberalization Prathi Seneviratne 1 Human Capital Investment and Labor Supply: Adjustments to Trade Policy (job market paper) Trade liberalization alters the returns to human capital investment. Classical theory predicts human capital investment and wage inequality will decline in a low-skill-abundant country. However, empirical evidence is mixed; the wage skill premium either increased or evolved non-monotonically in some developing countries, while schooling enrollment either increased or remained unchanged in others. Classical theory ignores the endogeneity and multi-dimensionality of human capital, and the link between short-run labor market responses to long-run outcomes. This paper develops a dynamic equilibrium model of the labor market to assess trade-induced transitional dynamics, linking individual education and employment decisions with aggregate labor supply, output, and welfare. The model is estimated with Sri Lankan labor force data and used to simulate a tariff reduction in the manufacturing sector. The findings are: 1) Human capital investment falls in the short run, diminishing the potential long-run gains to trade; 2) Labor market reallocation takes several years, resulting in large adjustment costs for workers and the overall economy; 3) The wage skill premium evolves non-monotonically but converges to a higher level than before, as workers sort into the two extremes of the skill distribution; 4) Income transfers that directly increase the human capital stock perform better in harnessing long-run gains than policies that simply defray the costs of switching sectors; 5) Growth in the physical capital stock — mimicking foreign direct investment — increases wage inequality, in line with theories that suggest foreign direct investment has contributed to rising wage inequality. 2 Trade Liberalization, Human Capital, and the Skill Premium (in progress) This paper further explores the dynamics of education investment and the skill premium documented in the first paper. Using a modified framework that links the degree of trade openness to total factor productivity (TFP), the model attempts to explain the mixed empirical evidence on developing country skill premia. The model is calibrated with labor force data used in the first paper and UN Comtrade data. Preliminary tests show that education costs, sector-specific skill intensities, and TFP evolution together determine the dynamics of skill premia and education investment after a trade reform. 3 The Welfare Impact of Trade in Services (in progress) Although the empirical literature on trade and labor markets has largely focused on commodities, services trade has been rising in recent years. This suggests that more developed economies, in which services has overtaken commodities in GDP share, are exposed to increased trade risk. Moreover, because services is relatively high-skilled, high-skill workers may be increasingly exposed to trade. Using CPS and BEA trade data, this paper evaluates the welfare impact of services trade, looking at mean wages, wage volatility and unemployment risk over the lifetime.
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Packet - Economics - Johns Hopkins University

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