Adjusting to Transitory Shocks: Worker Impact, Firm Channels, and (Lack of) Income Support

Ana Margarida Fernandes and Joana C. G. Silva

No 10448, Policy Research Working Paper Series from The World Bank

Abstract: This paper estimates worker, firm and assistance programs’ responses to foreign shocks in Brazil exploiting quasi-experimental variation in firms’ foreign demand resulting from the Global Financial Crisis. It shows these transitory shocks have permanent effects in a setting characterized by a large informal sector. While the informal sector provides a buffer mitigating long-term scarring, it is not sufficient to compensate worker and firm scarring. Scarring occurs for incumbent workers, not just displaced workers. Linking employer-employee data with the national registry of low-income households, unemployment insurance disbursement records, and worker-level training, the paper finds that assistance programs fail to mitigate adjustment. Training does not respond, unemployment insurance compensates 4 percent of workers’ wage losses and welfare programs 2 percent. Firms in highly concentrated sectors or state-owned do not bear the burden of adjustment. Other firms bear the burden and either exit or restructure, downsizing employment and productivity, scarring incumbent workers and increasing long-run inequality.

Date: 2023-05-18
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