The Need for a "Complete" Labor Market in CGE Modeling

Unemployment in the whole world is at an all-time high. But nowhere is the employment challenge greater than in the developing world, particularly in Africa. Former studies already suggested that in order to reduce poverty you have to take care of a country’s employment situation. Even though, when it comes to development policy and analysis, research mostly concentrates on trade and investment issues. In the case of CGE (Computable General Equilibrium) modeling the focus mostly lies on the welfare and GDP effects of a trade policy change; i.e. no variable is explicitly concerned with labor or employment issues. No wonder, since those issues are highly under represented in the existing general equilibrium models. First of all this paper points out the importance of labor market issues in development policies. Particularly in the course of globalization trade and liberalization of export oriented policies are taken into consideration, but generally the focus lies on those labor market policies which are applied in the developing world at most. Secondly, the paper provides a review of various approaches of labor market modeling and introduces some starting points of integrating the labor market and corresponding policies, like minimum wages, in the CGE model GTAP (Global Trade Analysis Project). Finally, some specific simulations are carried out with the extended but also with the standard model, in order to compare the results and elucidate the influence of the new implemented components.