Congress plays a major role in formulating and implementing U.S. trade policy through its Constitutional role in regulating foreign commerce. This role includes providing authority to the President to conclude trade agreements to eliminate and reduce tariff and non-tariff barriers to U.S. trade with other countries. For Members of Congress, trade can be a difficult issue, because decisions that liberalize trade flows have mixed effects on U.S. domestic and foreign interests, both economic and political. Historically, Congress has supported policies to open international markets to U.S. goods, services, and agriculture. It also has weighed carefully the economic impact of trade agreements to asses their benefits and costs. Congress also has enacted targeted adjustment assistance programs to provide training and other assistance to help workers and firms that may be dislocated by greater market opening adjust to new economic opportunities. Anticipating congressional consideration of a free trade agreement between the United States and South Korea (KORUS FTA), a number of groups offered estimates to quantify potential effects of the FTA on U.S. employment. This report discusses the models used to estimate the employment effects of the agreement and their various assumptions, necessary in order for the model to generate results. Invariably, these assumptions determine to some extent the results that are generated and, therefore, limit their representation of the real world economy. The models also are highly sensitive to assumptions used to establish the parameters of the models and are hampered by a lack of data in some areas. In general, the various economic models provide differing estimates of the magnitude of changes in U.S. employment that could arise from a trade agreement with South Korea, reflecting different assumptions and conditions. Both advocates and opponents of the KORUS FTA cite results of these studies to support their position. Each of these models has strengths and weaknesses and varies in the degree to which it reflects economic reality. These models are discussed at greater length in the analyses that follow. In addition, the potential job effects need to be viewed in terms of their relative share of U.S. employment. Estimates from the studies range from as many as 280,000 jobs potentially gained to 159,000 jobs potentially lost over the ten-year implementation period of the KORUS-FTA. Middle-range estimates include one often cited by the Obama Administration, which suggests that the KORUS FTA would support 70,000 export jobs. At the other end of the spectrum, other estimates suggested that the United States could lose 345,017 jobs over ten years if the United States did not approve and implement the KORUS-FTA but the European Union (EU) and Canada implemented their FTAs with South Korea. None of these estimates, which represent gains or losses in employment over a ten-year period, account for more than 1.4% of total goods-producing employment, or 0.26% of total employment in the U.S. economy in 2009. None of these studies, however, draws a direct link between any expected changes in trade from a change in tariffs and subsequent changes in employment. These estimates reflect different methodologies and assumptions, and a partial accounting of the total economic effects of such agreements. For instance, the agreement includes provisions on trade in goods, services, and investment. Due to the complexities involved and a lack of data, nearly all estimates focus only on changes in goods-producing employment. As a result, they do not serve well as an indicator of the overall impact of the agreement on the economy. The estimates selected for analysis are the following. U.S. International Trade Commission (USITC): U.S-Korea Free Trade Agreement Potential Economy-wide and Selected Sectoral Effects The University of Michigan: Economic Effects of a Korea-U.S. Free Trade Agreement U.S.-Korea Business Council: Failure to Implement the U.S.-Korea Free Tr ade Agreement: The Cost for American Workers and Companies Economic Policy Institute (EPI): Trade Policy and Job Loss: U.S. Trade Deals with Colombia and Korea Will be Costl y In addition, two other estimates, derived by the USITC and released by the Obama Administration and the Majority Staff of the Senate Finance Committee Trade Subcommittee, are reported. Congress has demonstrated an ongoing interest in concluding trade agreements to eliminate and reduce barriers to U.S. trade in goods, services, and agriculture, and it has assumed a direct role in assessing the impact of trade agreements on the U.S. economy. This report provides background and context for the analyses of the various estimates. It summarizes congressional interest in the issue and then examines the specific estimates—their findings, assumptions, methodologies, and the limitations of those methodologies. Finally, it explains the broader macroeconomic and microeconomic context in which the composition of employment within the economy is affected by a new trade agreement. Although discussions of trade agreements often focus on potential employment gains or losses, most economists argue that such employment estimates represent a partial accounting of the total economic effects of trade agreements and, therefore, do not perform well as an indicator of the overall impact of the agreement on the economy. As this report attempts to explain, estimating such employment effects is imprecise and highly sensitive to the assumptions that are used. In addition, while trade agreements generally are comprehensive in nature and cover goods, services, and investment, most employment estimates focus narrowly on the goods sector and do not adequately represent the total impact of the agreements. It is difficult to estimate precisely the employment effects associated with liberalizing trade in services and reducing or eliminating barriers to investment flows. Trade in services, in particular, is characterized by a broad array of formal and informal barriers that challenge efforts to translate the barriers into tariff-equivalent values. Negotiations to reduce barriers to trade in services, however, potentially could have a very large and positive effect on the U.S. economy, since the United States is highly competitive in a number of services sectors and U.S. direct investment abroad often spurs exports. Finally, estimates of employment arising from FTAs, by themselves, do not account for a broad range of benefits for the economy as a whole. For example, FTAs may provide individual consumers and firms with broader economic benefits and yield broad productivity and efficiency gains for the economy over the long run that may enhance employment. While most economic trade models attempt to model consumer and corporate behavior associated with changes in income, the results of the models depend on a number of factors, including the way changes in prices are passed along to consumers. Most estimates generally assume that the changes in tariffs and, therefore, changes in the prices of goods, will be adopted at the time the agreement is signed and then the annual changes in traded goods are aggregated over ten years. In fact, in the KORUS-FTA, some tariffs will drop to zero immediately, while others will be implemented in tariff reduction stages over ten years, with the impact on prices accruing over time. In the models, expected changes in the trade in services generally are treated as exogenous factors and must be specified outside the model itself. A key assumption used in generating a number of the estimates of the impact of the KORUS-FTA is the level of employment in the U.S. economy during the ten-year period required to phase in the agreement. None of these estimates, however, generate precise estimates of the exact number of jobs to be gained or lost, but generate estimates that reflect the relative magnitude of changes in employment that could be expected over ten years, provided that all other things remain constant. One approach assumes that the U.S. economy operates at a level of full employment over the next decade and holds the level of employment in the economy stable while wage rates are allowed to adjust. A second approach, and one that has been used extensively to derive many of the estimates evaluated in this report, assumes that the economy is marked by a rate of unemployment that reflects current economic conditions, or an economy that is operating at less than full employment. This assumption, more than any other, seems to be the most important factor generating estimates of employment effects under the KORUS-FTA. While the U.S. economy currently is operating at less than full employment, it seems reasonable to assume that over the next ten years the economy will return to its long-term trend that is closer to full employment as the economy recovers from the most severe economic recession in the post-World War II period. Trade models of the type used in the analysis of free trade agreements are part of a class of economic models referred to as computable general equilibrium models (CGE) that incorporate data on trade and a range of domestic economic variables on nearly 100 countries. As a result of this large number of countries, and the vast amounts of data that are a part of the model, the models can provide important insights into the mechanisms by which changes in tariffs or other parameters can affect a range of countries. For practical reasons, however, the data in the models must be limited, so the models necessarily must sacrifice some level of precision in their estimating abilities. Since such trade models originally were developed with the intent of analyzing the economic effects of multi-country trade agreements such as the Uruguay Round, this lack of precision was not considered to be an important drawback. However, this lack of precision may be an issue when the models are used to estimate the effects of bilateral trade agreements where the overall amount of trade and, therefore, the impact of the agreement, is expected to be less than that of a comprehensive multilateral agreement. In addition, such models do not account for changes in exchange rates, since such effects were considered to be neutral in a large multi-country trade agreement. Movements in exchange rates, however, could have an important impact on trade patterns that involve countries that are parties to a bilateral trade agreement. With floating exchange rates, movements in those rates can have an important effect on the prices of internationally-traded goods.