Incorporating Industry-Specific Wages and Unemployment into the GTAP Model: U.S.-EU Trade Liberalization Scenarios

This paper applies a new GTAP Labor model (GTAP-LAB) developed by Peterson (2019) to analyze U.S.-EU trade liberalization scenarios. When job search frictions and unemployment are incorporated into the GTAP model, the model estimates changes in wages at the sectoral level. Simulated effects of a unilateral tariff elimination by the EU on U.S. exports of food and agricultural products show that while U.S. food and agricultural workers have the largest gain in wages, workers in other U.S. industries have smaller gains, and workers in the U.S. metals industry experience a small wage decline. Simulated effects of a full bilateral tariff liberalization between the United States and the EU show wage gains for U.S. workers in different industries, with the highest gains for U.S. food and agricultural workers, where the extent of the EU tariff liberalization is the biggest. The full U.S.-EU bilateral tariff removal scenario also leads to U.S. worker reallocation across industries, with the largest increase in employment in the services sectors, mainly due to an increase in overall household income, and a decline in U.S. employment in extraction, metals and other manufacturing industries. Finally, sensitivity analysis shows that the simulated effects are sensitive to the labor substitution elasticities used between existing and matched labor — the higher frictions to labor reallocation, the bigger the effect on sectoral wages. The wage results could be different not only in magnitude, but also in signs when using different labor substitution elasticities in the GTAP-LAB model.