14 December 2020

The Leisure Gains from International Trade

Agustin Velasquez devotes a chapter of his recent PhD thesis in International Economics to labour supply and its link to aggregate income and international trade. He shows that workers indirectly benefit from international trade by increasing their leisure time. Trade openness generates a rise in labour income at the country level. In turn, workers react to this boost by reducing their supply of working hours and enjoying more leisure. 

How did you come to choose your research topic, macroeconomics and labour markets?

In some ways, I think the topic chose me, and not the other way around. In 2018 I did an internship at the International Monetary Fund (IMF) where I was assigned to work on a labour project. It involved analysing the response of hours worked to labour and consumption taxes in EU new member states. This assignment introduced me to the literature on labour supply and further enhanced my interest on labour issues. Back in Geneva, I assisted Professor Nicolas Depetris Chauvin with a trade-related study which simulated a free-trade agreement between Argentina and the US. These experiences motivated me to interlink both areas of research.

Can you describe your research questions and methodology?

The main chapter of my thesis asks the following question: If a worker receives a one-percentage-point increase in their wage, would they decide to work more, less, or the same number of hours? The response comes down to preferences. Do workers prefer to work less time to enjoy more leisure, or work more time to consume more goods and services? Providing an empirical answer to this question is challenging. It requires a source of aggregate income variation that is independent from preferences and other variables that affect labour supply decisions (e.g. labour legislation). International trade solves this problem. When countries open to trade, the real wage rises due to cheaper imported goods and better technology. In addition, much of the observed bilateral trade is explained by the geographic distance between trading partners. In sum, my chapter sheds light on a novel mechanism that links hours worked and international trade through income. 

In terms of methodology, I proceed in three steps. First, I build a multi-country trade model. The model derives an expression of the number of hours worked in any country as a function of aggregate income and trade openness. Then, I empirically estimate these relationships using econometric techniques. Finally, I compute counterfactual simulations that allow me to precisely measure the response of hours worked to changes in trade openness.

What are your major findings?

In my thesis, I find that the average worker reduces its labour supply as a response to higher wages. This means that workers slightly prefer more leisure time relatively to more goods and services. These preferences largely explain why workers in developing countries spend, on average, more hours employed than those in developed countries. In addition, these preferences also explain why our grandparents used to work much more than us.

More specifically, I find that the rise in trade openness between 1950 and 2014 is providing today between 35 to 170 hours of leisure per worker per year. This rise in trade accounts on average for 18% of the total decline in hours per worker that is observed between 1950 and 2014 in a large set of developed and developing countries.

What could be the social and political implications of your thesis?

I show that the benefits from trade manifest beyond higher consumption and materialise also into more leisure time. This is often ignored in trade policy debates because, unlike consumption, leisure time is not tangible. But what is leisure? Leisure manifests in many forms of non-working time, which may vary across countries. For example, annual leisure can take the forms of paid leave, holidays, paternal leave, sick leave, etc. In another chapter of my PhD, co-author Nicolas Depetris Chauvin and I disaggregate the leisure gains from trade across workers of different demographic characteristics. We find that young and elder workers reduce working hours significantly more than prime-age workers. These findings suggest that the leisure gains from trade are not equally distributed within the household, and that some workers benefit much more than others. These findings are particularly relevant for workers in developing countries. These countries have low labour productivity, which pushes workers to spend many hours at work. In addition, developing countries do not trade much. This implies that there are ample possibilities to use trade as means to provide leisure time for workers in developing countries.

What are you doing now?

In September 2020 I joined the IMF as an economist through the Economist Program (EP). I am currently working with the Bahrain country team in the Middle East and Central Asia department.

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Agustin Velasquez defended his PhD thesis in International Economics in August 2020. Professor Cédric Tille presided the committee, which included Professor Ugo Panizza and Professor Nicolas Depetris Chauvin, thesis co-supervisors, and Associate Professor Timo Boppart, Institute for International Economics Studies, Stockholm University.

Full citation of the PhD thesis:
Velasquez, Agustin. “Essays on Macroeconomics and Labor Markets.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2021.

Good to know: members of the Graduate Institute can download the PhD thesis from this page of the Institute's repository.

Interview by Nathalie Tanner, Research Office.
Banner picture: excerpt from an image by FrankHH/