The Effects of Increasing Openness and Integration to the Mercosur on the Uruguayan Labor Market: A CGE Modeling Analysis

PEP Working Paper No. 2006-06

41 Pages Posted: 13 Apr 2006 Last revised: 11 Jul 2018

See all articles by Maria Inés Terra

Maria Inés Terra

Universidad de la Republica, Uruguay

Marisa Bucheli

Universidad de la Republica, Uruguay

Silvia Laens

Centro de Investigaciones Economicas (CINVE - Uruguay)

Carmen Estrades

Universidad de la Republica, Uruguay; International Food Policy Research Inst.

Date Written: April 1, 2006

Abstract

Uruguay is a small economy. Its integration into MERCOSUR has increased its exposure to regional macroeconomic instability. The aim of this paper is to assess the impact of regional integration on the country's labor market and poverty. We estimated wage differentials between labor categories, finding a 60 percent wage gap between formal and informal workers. A CGE model with an efficiency wage specification for unskilled labor was built, with results showing that regional shocks deeply affect the Uruguayan economy. The consideration of an efficiency wage model is particularly important when shocks lead to a reallocation of resources towards sectors intensive in unskilled labor. A subsidy on formal, unskilled labor could contribute to decrease informality and therefore increase GDP, but this type of policy needs to be carefully implemented because it may have negative effects on investment. Finally, the effects on poverty and income distribution obtained through microsimulations are consistent with the results of the CGE experiments.

Keywords: Uruguay, labour market, general equilibrium model, regional integration, efficiency wage, microsimulation, poverty

JEL Classification: D58, I32, F15, F16, J41

Suggested Citation

Terra, Maria Inés and Bucheli, Marisa and Laens, Silvia and Estrades, Carmen, The Effects of Increasing Openness and Integration to the Mercosur on the Uruguayan Labor Market: A CGE Modeling Analysis (April 1, 2006). PEP Working Paper No. 2006-06, Available at SSRN: https://ssrn.com/abstract=895485 or http://dx.doi.org/10.2139/ssrn.895485

Maria Inés Terra (Contact Author)

Universidad de la Republica, Uruguay ( email )

Jose E. Rodo 1854
CP 11200 Montevideo, 11200
Uruguay

Marisa Bucheli

Universidad de la Republica, Uruguay ( email )

Jose E. Rodo 1854
CP 11200 Montevideo, 11200
Uruguay

Silvia Laens

Centro de Investigaciones Economicas (CINVE - Uruguay) ( email )

Montevideo, CP 11200
Uruguay

Carmen Estrades

Universidad de la Republica, Uruguay ( email )

Constituyente 1502, Piso 6
Montevideo, 11200
Uruguay

International Food Policy Research Inst. ( email )

United States

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