Calibrating Wage-Productivity Responses in CGE Model Simulations of Trade Policy Impacts

11 Pages Posted: 16 Sep 2016 Last revised: 15 Oct 2016

See all articles by Dan Ciuriak

Dan Ciuriak

Ciuriak Consulting Inc.; Centre for International Governance Innovation (CIGI); C.D. Howe Institute; Asia Pacific Foundation of Canada; BKP Development Research & Consulting GmbH

Jingliang Xiao

Infinite-Sum Modeling Inc.; Ciuriak Consulting Inc.

Date Written: September 14, 2016

Abstract

It is well established in theory that trade liberalization impacts on productivity through the reallocation of market share to more productive firms. Since more productive firms tend to pay higher wages, the market reallocation effect also increases average wages. In addition to these intra-sectoral effects, changes in the composition of output at the economy-wide level result in reallocation of factors of production to higher-productivity sectors. At the same time, the positive demand shock from trade liberalization typically generates increased returns to factors, and thus results in higher real wages for labour. For these various reasons, we anticipate a positive relationship between changes in productivity and changes in real wages in response to trade liberalization. This is consistent with the observed long-run relationship across countries and over time between wages and productivity and is also consistent with the theoretical expectation that labour is paid its marginal product. In a computable general equilibrium modelling environment, various methods have been developed to build in productivity effects from trade liberalization. There is little guidance however as to how strong these effects should be. We propose an elegant solution to the calibration problem by imposing a unitary elasticity of the supply of labour input to the wage rate. This generates an endowment effect, interpreted as labour productivity rather than jobs, that rises proportionately with wages. This approach to endogenization of productivity in a CGE environment thus uses the model-generated contribution of factor inputs to production and the stylized facts about the relationship between wage and productivity growth to calibrate the productivity impact of trade liberalization.

Keywords: CGE, Wage Rates, Productivity, Heterogeneous Firms, Trade Policy Simulation

JEL Classification: F13, F14, F68

Suggested Citation

Ciuriak, Dan and Xiao, Jingliang, Calibrating Wage-Productivity Responses in CGE Model Simulations of Trade Policy Impacts (September 14, 2016). Available at SSRN: https://ssrn.com/abstract=2839624 or http://dx.doi.org/10.2139/ssrn.2839624

Dan Ciuriak (Contact Author)

Ciuriak Consulting Inc. ( email )

83 Stewart St.
Ottawa, Ontario K1N 6H9
Canada

Centre for International Governance Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

C.D. Howe Institute ( email )

67 Yonge St., Suite 300
Toronto, Ontario M5E 1J8
Canada

Asia Pacific Foundation of Canada ( email )

Canada

HOME PAGE: http://ciuriakconsulting.com/

BKP Development Research & Consulting GmbH ( email )

Romanstrasse 74
M√ľnchen, 80639
Germany

Jingliang Xiao

Infinite-Sum Modeling Inc. ( email )

16167,Glenbrooks Pl
Vancouver, BC - British Columbia v4n1t3
Canada
6047245981 (Phone)
6047245981 (Fax)

HOME PAGE: http://www.infsum.com/en/

Ciuriak Consulting Inc. ( email )

83 Stewart St.
Ottawa, Ontario K1N 6H9
Canada

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