Trade reform and regional dynamics: evidence from 25 years of Brazilian matched employer-employee data

Rafael Dix Carneiro and Brian Kovak
Authors registered in the RePEc Author Service: Rafael Dix-Carneiro

No 7205, Policy Research Working Paper Series from The World Bank

Abstract: This paper empirically studies the dynamics of labor market adjustment following the Brazilian trade reform of the 1990s. The paper uses variation in industry-speci?c tari? cuts interacted with initial regional industry mix to measure trade-induced local labor demand shocks and examines regional and individual labor market responses to those one-time shocks over two decades. Contrary to conventional wisdom, the analysis does not ?nd that the impact of local shocks is dissipated over time through wage-equalizing migration. Instead, it ?nds steadily growing e?ects of local shocks on regional formal sector wages and employment for 20 years. This ?nding can be rationalized in a simple equilibrium model with two complementary factors of production, labor and industry-speci?c factors such as capital, that adjust slowly and imperfectly to shocks. Next, the paper documents rich margins of adjustment induced by the trade reform at the regional and individual levels. Workers initially employed in harder hit regions face continuously deteriorating formal labor market outcomes relative to workers employed in less a?ected regions, and this gap persists even 20 years after the beginning of trade liberalization. Negative local trade shocks induce workers to shift out of the formal tradable sector and into the formal nontradable sector. Non-employment strongly increases in harder hit regions in the medium run, but in the longer run, non-employed workers eventually ?nd re-employment in the informal sector. Working age population does not react to these local shocks, but formal sector net migration does, consistent with the relative decline of the formal sector and growth of the informal sector in adversely a?ected regions.

Keywords: Economic Theory&Research; Regional Economic Development; Labor Markets; Labor Policies; Emerging Markets (search for similar items in EconPapers)
Date: 2015-03-02
New Economics Papers: this item is included in nep-lma and nep-ure
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Citations: View citations in EconPapers (37)

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Related works:
Working Paper: Trade Reform and Regional Dynamics: Evidence From 25 Years of Brazilian Matched Employer-Employee Data (2015)
Working Paper: Trade Reform and Regional Dynamics: Evidence From 25 Years of Brazilian Matched Employer-Employee Data (2015)
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