Trade Reform and Regional Dynamics: Evidence from 25 Years of Brazilian Matched Employer-Employee Data

Abstract

We empirically study the dynamics of labor market adjustment following the Brazilian trade reform of the 1990s. We use variation in industry-specific tariff cuts interacted with initial regional industry mix to measure trade-induced local labor demand shocks, and then examine regional and individual labor market responses to those one-time shocks over two decades. Contrary to conventional wisdom, we do not find that the impact of local shocks is dissipated over time through wage-equalizing migration. Instead, we find steadily growing effects of local shocks on regional formal sector wages and employment for 20 years. This finding can be rationalized in a simple equilibrium model with two complementary factors of production, labor and industry-specific factors such as capital, that adjust slowly and imperfectly to shocks. Next, we document rich margins of adjustment induced by the trade reform at the regional and individual level. Workers initially employed in harder hit regions face continuously deteriorating formal labor market outcomes relative to workers employed in less affected 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 find 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 affected regions.

Trading off the Income Gains and the Inequality Costs of Trade Policy

“…1 See also Artuc, Lederman and Porto (2015), , Melitz and Redding (2015), Arkolakis, Costinot, Donaldson and Rodriguez-Clare (2015), and Caliendo, Dvorkin and Parro (2016). 2 See also Nicita, Olarreaga and Porto (2014), Faber (2014), Goldberg and Pavcnic (2007), Topalova (2010), Kovak (2013), Autor, Dorn and Hanson (2013), Dix-Carneiro and Kovak (2017). income gains.…”

International import competition and the decision to migrate: Evidence from Mexico

“…Dix-Carneiro and Kovac (2015) study the effect of the trade liberalization in Brazil and find almost no effect on migration.…”

Trade and towns: Heterogeneous adjustment to a border shock

“…U readily borrows the properties of u by equation (13). It thus follows that aggregate welfare is increasing in market access and in the relative abundance of the housing stock: ∂U/∂p j > 0 and ∂U/∂A j > 0, any j. Equilibrium utility of towns.…”

“…In this model, welfare is equalized across towns. In a similar vein, Autor, Dorn and Hanson (2013), Monte (2015) and Dix-Carneiro and Kovak (2015) explore the impact of growing import penetration respectively in the United States and Brazil, taking initial industry specialisation as the regional trade exposure measure and abstracting from town size. Another recent literature explores responses to external opening of goods and factor markets, considering intra-national spatial frictions (e.g.…”

“…In equilibrium, towns endowed with large stocks of immobile factors have a large population as per equation (10), thus the equilibrium relationship (25) implies that ℓ j is decreasing in town size given p j if and only if λ < 1. 13 Is this a reasonable assumption? Plugging (25) into (12) and using the definition of ℓ j yields the following expression for equilibrium density:…”