Anticipated Tariff Reductions and Compensating Differentials in Wages

I construct an economic model that simulates the effects of tariff reductions on domestic wages and employment. The model focuses on the compensating increases in wages and reductions in employment that precede a tariff reduction when the reduction is anticipated but not when the reduction is a surprise. I calibrate the model to 2023 data from the U.S. manufacturing sector and simulate the economic effects of eliminating all tariffs on U.S. imports of manufactures. Then I examine the sensitivity of these effects to modeling assumptions about the transferability of work experience between jobs, unemployment of displaced workers, and workers’ discount rates. Compensating differentials in wages can be important considerations when developing econometric estimates of labor market responses to changes in trade policy and also when designing trade adjustment assistance programs.