imports; so this small employment multiplier is not surprising. The operation phase generates a slightly larger effect with employment increasing, by the end of the projection period, by 2.5 percent. What can be expected of these quantity changes in terms of income distribution? Assuming that unemployed workers are in the lower tail of the distribution, a reduction of unemployment may have some equalizing effect. However these effects will be negligible given that only a small fraction of the population (those escaping unemployment) benefits from increased incomes. The results reported in the above sections can thus be thought of as a sort of upper bound for the changes in inequality and poverty. In an intermediate situation, where both wages and employment respond to the Canal shock, employment effects would be even smaller and the wage effects would be somewhat muted entailing once again reduced distributional impacts.<sup>28</sup> There are also additional caveats to the results presented here, many of which indicate directions for future research. First, our estimates are based on a structural model and therefore are determined to a large extent by the structure of the economy in the base year. Therefore, the expanded Canal is essentially a larger version of the Canal today; it does not develop any new linkages to the rest of the economy or generate important economy-wide spillovers (productivity or otherwise). Second, although we have attempted to link the macro and micro sides of the analysis as closely as possible, a number of inconsistencies remain. Our macro analysis does not capture self-consumption or intra-household transfers, which may be particularly important for the poorest households. Similarly, our micro analysis does not take into account changes in payments to capital, which are particularly relevant to the households in the top portion of the income distribution. Thus, our poverty and inequality results pertain mainly to the changes in returns to labor. Third, even if the unemployment rate in Panama is insensitive to periods of economic boom or bust, the response among under-employed may be significant. Therefore, our analysis may ignore potentially important employment creation effects through this channel. Finally, our micro analysis focuses only on firstorder effects and does not allow households to re-optimize their consumption bundle in response to aggregate price changes. Thus, we could be over-stating the losses incurred by the poorest households, since they may be able to switch to lower-cost products when prices of some food items rise.

# **5. Conclus** i **ons**

The Panama Canal is a major source of export revenue for Panama, but its contribution to value added and employment is much more limited. Using a dynamic macro-micro framework, this paper has argued that the proposed expansion of the Canal is likely to have significant macroeconomic effects only during the operations phase (2014 and onwards), and that income gains linked to the construction and operation of the new Canal are likely to be concentrated in the top portion of the income distribution. There are three main reasons for these conclusions. First, our approach does not allow for any net employment creation from investment in the Canal; this is consistent with econometric evidence on Panama‘s labor markets but differs from the view adopted by several macroeconomic studies of the Canal expansion. Second, Panama may experience

> 28 Notice that inequality is driven by changes in relative wages (skilled versus unskilled). In the additional CGE runs performed to test robustness of the results, the skilled premia increases less than in the standard (full employment) closure.

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