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Income Inequality Effects of Ukraine’s Trade Liberalization with the EU. Are there 'two Ukraines'?

Miriam Frey

No 9664, EcoMod2016 from EcoMod

Abstract: This paper analyzes the effects of Ukraine's trade liberalization with the EU on income inequality using a computable general equilibrium (CGE)-microsimulation model for Ukraine. Special focus is thereby given to between- and within-parts income inequality to study whether the Western and the Eastern part of Ukraine are affected differently. Even though overall income distribution effects are rather small, Ukraine's unilateral tariff elimination turns out to act more on the within- rather than on the between-parts income inequality. Taking into account the distributional effects of trade liberalization requires an appropriate modeling approach. Thus, a computable general equilibrium (CGE) model is linked with a microsimulation model for Ukraine in a sequential way (top-down approach). This means that Ukraine’s trade integration with the EU is first simulated in the CGE model to obtain changes in factor returns and prices. In the second step, those are used as exogenous variables in the microsimulation model to simulate the effects on endogenous variables like labor income and labor market status. Based on this outcome, the main variable of interest - real income per equalized person - is calculated for all households in the sample. As indicated by the Gini index, overall income distribution effects in Ukraine are rather small. However, looking at the impact on income inequality measured by the Theil index gives some interesting insights as it allows for a decomposition across the western and the eastern part of Ukraine. The biggest share of total income inequality in Ukraine is explained by within-parts inequality. Accordingly, trade liberalization affects total income inequality in Ukraine only via its impact on within-parts inequality. It turns out that the more relevant grouping criterion to identify between-groups income inequality effects is a rural/urban rather than a west/east division of households. In this respect, the answer to the initial question whether there are 'two Ukraines' must be 'no'.

Keywords: Ukraine; General equilibrium modeling; Microsimulation models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cis, nep-cmp and nep-int
Date: 2016-07-04
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