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Trade Liberalization and Regional Dynamics

Rafael Dix-Carneiro and Brian K. Kovak

American Economic Review, 2017, vol. 107, issue 10, 2908-46

Abstract: We study the evolution of trade liberalization's effects on Brazilian local labor markets. Regions facing larger tariff cuts experienced prolonged declines in formal sector employment and earnings relative to other regions. The impact of tariff changes on regional earnings 20 years after liberalization was three times the effect after 10 years. These increasing effects on regional earnings are inconsistent with conventional spatial equilibrium models, which predict declining effects due to spatial arbitrage. We investigate potential mechanisms, finding empirical support for a mechanism involving imperfect interregional labor mobility and dynamics in labor demand, driven by slow capital adjustment and agglomeration economies. This mechanism gradually amplifies the effects of liberalization, explaining the slow adjustment path of regional earnings and quantitatively accounting for the magnitude of the long-run effects.

JEL-codes: F16 J23 J31 J61 O15 O19 R23 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20161214
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