Imperfect labour mobility, urban unemployment and agricultural trade reform in Chile

Agricultural trade policy reform raises a number of concerns. First, the presence of significant rural-urban income divergence resulting in rural-urban migration caused faster urban population growth and the emergence of high levels of urban unemployment. Second, price bands are used to stabilise domestic price movements in selected agricultural crops and processed agricultural commodities.This paper considers the two above-mentioned issues in the context of a model that incorporates specific economic features related to the Chilean economy and studies the effect these features might have on the economic analysis of the outcome of trade liberalisation. These features are: rural-urban migrationurban unemploymentimperfect labour mobility.The author uses a formal general equilibrium model to illustrate some important agricultural trade policy consequences of urban unemployment and imperfect labour mobility. This formal model highlights the underlying structure of a large (fifty-sector) numerical general equilibrium model.This paper also presents the results of simulations designed to quantify the effects of removing the price bands in Chile under the assumption of dual labour markets with imperfect labour mobility. The authors examine the effect of this policy on the following variables: the change in welfarethe rate of urban employmentthe rural labour wage baseline agricultural production and imports.The findings of the model suggest that given the existence of urban unemployment and its second-best implications, policies harmful to agriculture and other rural-based industries should be approached with caution if they are likely to provoke worsening terms of trade for the rural sectors. The gains from lower natural resource prices are likely to be offset by worsening rural-urban income divergence and urban unemployment. Based on the model’s results, the paper proposes the following policy lessons:the removal of the price bands on wheat, sugar, and fats and oils increases welfarethe net effects of total agricultural tariff elimination are estimated to be negativethe elimination of all agricultural and food tariffs generates sufficient urban unemployment so as to negate the positive welfare effect stemming from lower agricultural and food pricesChile’s labor policy needs to be closely coordinated with possible trade liberalisation.