may be created or lost through DR-CAFTA. While the introduction of a flexible unemployment rate through semi-rigidity in wages is straightforward in the CGE model used in this paper, the specification of the minimum wage path that gives rise to unemployment is much more complicated. In order to provide a quick illustration of the potential employment effects of DR-CAFTA, we instead implement a simple approach of fixing real wages at _BaU_ levels and allowing the growth of the labor supply to become endogenous. In other words, labor supply in every time period is determined by labor demand. The results show that by 2016, the employment of unskilled, skilled, and tertiary-skilled workers would rise by 3.6, 5.3, and 3.9 percent relative to _BaU_ under the _CBL_ liberalization schedule. Overall, an additional 136,788 jobs are created in this scenario—a 3.9 percent increase from _BaU_ —and 66 percent of these new workers are unskilled. Most of this increase comes from employment gains in the non-farm sector: while agricultural employment increases by 7,710 workers, employment in non-agriculture rises by 119,590 workers.<sup>40</sup> Although the magnitude of employment gains is not large relative to the total stock of workers (3.8 percent of total employment in 2015), the additional jobs created in this scenario are approximately equal to the base year employment in all agricultural sectors with the exception of domestic crops. Furthermore, the real GDP gains in this scenario significantly surpass the GDP effects of other simulations due to the increase in the stock of productive factors. Therefore, these results suggest that even a moderate degree of wage rigidity (a plausible assumption for Honduras) may give rise to significant employment creation following the bilateral liberalization of trade vis-`a-vis the US. They should also assuage one of the main concerns of policy makers with regard to trade reform: potential employment losses in agriculture.

# **6.5 Compatibility of regional liberalization with multilateral reform**

Up to this point, we have considered the effects of various trade liberalization scenarios independently of each other. However, since negotiations on regional and multilateral reform often take place simultaneously, policymakers are legitimately concerned about the compatibility of various liberalization scenarios with each other. Since entering into comprehensive trade liberalization agreements may be politically difficult, policymakers may prefer to sign smaller and/or regional agreements as stepping stones toward broader reform in the future. This section provides an empirical assessment of such strategies by contrasting the patterns of structural adjustment implied by the DR-CAFTA scenarios with full trade liberalization vis-`a-vis all trading partners. In other words, we would like to know whether the “partial” liberalization scenarios result in a sectoral allocation of resources that is compatible with full liberalization, in the following sense. If partial liberalization attracts resources to the same sectors that would prosper under free trade, the scenario is considered congruent with the full liberalization. If, on the other hand, a scenario results in a sectoral allocation of resources different from that implied by full liberalization, then additional costs must be incurred to re-allocate resources when (if) free trade is concluded. Using the terminology of Bhagwati (1991), the regional agreement in the latter example could be characterized as a “stumbling block” rather than a “building block” toward a global free trade regime.

In order to assess the compatibility of each partial scenario with global reform, this paper relies on a congruence metric proposed in World Bank (2004, Chapter 2), which is a measure of labor market “churning” generated by each scenario. This labor market adjustment consists of two parts: (1) movement from the initial equilibrium to the partial reform scenario, and (2) movement from

> 40The total does not sum to 136,788 jobs reported earlier because tertiary-skilled labor (included in the latter) is not segmented by sector.

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