Effects of the Completition of MERCOSUR on the Uruguayan Labor Market. A simulation exercies using a CGE model

The Mercosur was born as an imperfect Customs Union. During the transition phase to a complete Customs Union -starting in 1995-, each country established some exceptions to trade liberalization within the region and to the external common tariff. This paper deals with the possible effects on the Uruguayan labor market of the elimination of those exceptions. With that purpose, the changes in tariffs during the transition are simulated with a Computable General Equilibrium model. The model is specified for the Uruguayan economy but three other regions are considered: Argentina, Brazil and the rest of the world. There are nine sectors in the model, six of which are assumed to work under imperfect competition while the rest are perfectly competitive. In the sectors with imperfect competition a Bertrand type behavior is assumed. The labor market is segmented in skilled and unskilled labor and wages are flexible. The results show that the overall effects on the main variables and on the labor market are not important. The most significant changes are found in trade flows. However, at the sectoral level relevant changes are found in consumption, output, trade and factor allocation in those sectors that are most affected by the intra-zone liberalization or by the complete enforcement of the Common External Tariff.