the errors from the unit value equation will contain information on quality valuation across locations. The intuition is that consumers in a given location, such as an urban center, will shop in stores with similar quality gradients for product varieties, and thus the quality valuation can be estimated across localities, but not within localities. In any case, public policy analysts at this point would probably benefit from hiring knowledgeable consultants to perform the necessary estimations.

What is clear is that any analyses that end with the computations of the first-order effects needs to be accompanied by several caveats. One is to clearly tell readers that the first-order approximations are insufficient to derive policy conclusions about whether a trade reform (or trade-driven price shocks broadly defined) is likely to lead to IG, precisely because these computations are silent about behavioral changes dependent on employment and consumption choices. Again, readers of this note can read Wodon et al. (2008) and Ferreira et al. (2011) as examples of carefully written assessments of firs-order effects.

# **C. Relevant Policy Issues: Adjustment Costs and Skills**

So, what are some of the policy issues that could be discussed even if the more technically complicated estimations of the second order effects are not performed? From the viewpoint of IG, clearly the changes in income sources that would be embedded in the second order effects are crucial. Indeed, the agricultural households literature has found that household wealth, among other factors, determines the capacity to change income sources towards activities benefitting from relative price increases – see Ravallion (1990), Lopez et al. (1995).

The trade literature focuses on labor adjustment costs or mobility costs and related policies, such as trade-adjustment assistance programs designed to help workers hurt by trade shocks find alternative employment opportunities. The volume edited by Porto and Hoekman (2010) is a good place to start, as it includes accessible contributions by some of the leading academics in the field. The important thing to note is that workers and households might face certain costs the hamper their ability to change jobs across industries, across jurisdictions (regions), and even across firms. These costs might be associated with costs of moving across territories and costs associated with learning new skills required to perform jobs in another industry or firm. The existing academic literature has struggled with empirical estimations of these types of costs, but recent contributions by Artuc et al. (2010) and Dix-Carneiro (2011) have developed structural models to derive estimations methods that can identify the magnitude of worker mobility costs across industries (within countries). While the World Bank’s International Trade Department (PRMTR) and the Research Group (DECTI) are working on developing more evidence on the magnitude of labor adjustment costs and tools for estimating such costs across countries, policy analysts can continue to focus on the policy issues related to IG, such as best practices in the design of adjustment assistance programs, which go beyond the provision of social safety nets and public transfers.

Another important policy issue is related to skills. A substantial portion of the trade literature has focused on the skill premium as the main parameter that has determined whether trade and trade liberalization have been inclusive over the long run. Blaming skill-biased technical change, which raises 7