A Literature Review on Trade and Informal Labour Markets in Developing Countries

Abstract

This report provides a summary of the literature on the relationship between trade and informality in developing countries, with an emphasis on the BRIICS. While main conclusions of the ILO and WTO (2009) literature review are highlighted, the report focuses on additional and more recent literature. The report investigates four key issues in the literature on trade and informal labour markets: (1) theoretical predictions for trade and informality; (2) how trade liberalisation affects informal labour markets; (3) how trade flows affect the informal economy; and (4) what implications informality has for trade and growth. The main conclusion from this review is that empirical evidence on the relationship between trade and informality is complex and context-specific. Several of the empirical analyses reviewed in this report suggest that this variation is due to country-specific characteristics (in particular, labour market rigidity, capital mobility, level of economic development and heterogeneity of the informal workforce). Variation can also be partly explained by the fact that different methodologies are used and different measures of informality are employed across studies.trade, employment, inclusive growth, wages

Mastering the transition: A synthetic literature review of trade adaptation policies

“…Displaced workers lose their wage income; they have to search for a new job, learn new skills, and often have to bear, together with their families, the social costs of moving to other locations to find a new job (Hyman, 2018[72]; Hummels, Munch and Xiang, 2018 [73]). There may be a non-trivial lag between job destruction in import-competing sectors early in the reform process and a subsequent recovery and new job creation in exporting activities, which generates an increase in the unemployment rate (Menezes-Filho and Muendler, 2011 [74]; Hoekman and Porto, 2010 [57]; Autor, Dorn and Hanson, 2016 [75]). This lag can also be spatial, as job creation due to new export opportunities might happen in locations that are different from the locations suffering from rising import competition (Feenstra, Ma and Xu, 2019[65]; Costa, Garred and Pessoa, 2016 [63]).…”

“…For example, rigid labour market regulation can postpone trade-induced displacement for some time, but also hinders the creation of new formal sector jobs (Almeida and Poole, 2017 [83]). It may contribute to longer unemployment spells, decreasing labour force participation, or to the transition of displaced workers to the informal sector, where productivity and wages as well as social protection are lower (Munro, 2011[84]; Menezes-Filho and Muendler, 2011 [74]; Dix-Carneiro and Kovak, 2019 [85]; Hoekman and Porto, 2010 [57]). Inefficient capital markets can hamper the provision of funding to new and more productive firms and thus slow down the creation of new job opportunities (Dix-Carneiro, 2014 [80]).…”