Trade Liberalization and Labor Market Dynamics

This paper studies trade-induced transitional dynamics by estimating a structural dynamic equilibrium model of the labor market. The model features a multi-sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector-specific experience and costly switching of sectors. The estimation employs a large panel of workers constructed from Brazilian matched employer-employee data. The model’s estimates yield high average costs of mobility that are very dispersed across the population. In addition, sector-specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model as a laboratory for counterfactual experiments, this paper finds that: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly mitigated due to the slow adjustment; (3) trade-induced welfare effects are very heterogeneous across the population; (4) retraining workers initially employed in the adversely affected sector may reduce losses incurred by these workers and increase aggregate welfare; (5) a moving subsidy that covers costs of mobility is more promising for compensating losers, although at the expense of higher welfare adjustment costs. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of physical capital.Trade Liberalization, Labor Market Dynamics, Adjustment Costs, Worker Heterogeneity, Structural Econometric Models

Skills, exports, and the wages of five million Latin American workers

The returns to schooling or the skill premium is a key parameter in various literatures, including globalization and inequality and international migration. This paper explores the skill premium and its link to exports in Latin America, thus linking the skill premium to the emerging literature on the structure of trade and development. Using data on employment and wages for over five million workers in sixteen Latin American economies, the authors estimate national and industry-specific skill premiums and study some of their determinants. The evidence suggests that both country and industry characteristics are important in explaining skill premiums. The analysis also suggests that the incidence of exports within industries, the average income per capita within countries, and the relative abundance of skilled workers are related to the underlying industry and country characteristics that explain skill premiums. In particular, higher sectoral exports are positively linked with the skill premium at the industry level, a result that supports recent trade models linking exports with wages and the demand for skills.Labor Markets,Water and Industry,Tertiary Education,Labor Policies,Inequality

Skills, Exports, and the Wages of Seven Million Latin American Workers

The returns to schooling and the skill premium are key parameters in various fields and policy debates, including the literatures on globalization and inequality, international migration, and technological change. This paper explores the skill premium and its correlation with exports in Latin America, thus linking the skill premium to the emerging literature on the structure of trade and development. Using data on employment and wages for over seven million workers from sixteen Latin American economies, the authors estimate national and industry-specific returns to schooling and skill premiums and study some of their determinants. The evidence suggests that both country and industry characteristics are important in explaining returns to schooling and skill premiums. The analyses also suggest that the incidence of exports within industries, the average income per capita within countries, and the relative abundance of skilled workers are related to the underlying industry and country characteristics that explain these parameters. In particular, sectoral exports are positively correlated with the skill premium at the industry level, a result that supports recent trade models linking exports with wages and the demand for skills.

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

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

Globalization and inequality in Latin America

We survey the recent literature studying the effects of globalization on inequality in Latin America. Our focus is on research emerging from the late 2000s onward, with an emphasis on empirical work considering new mechanisms, studying new dimensions of inequality, and developing new methodologies to capture the many facets of globalization’s relationship to inequality. After summarizing both design-based and quantitative work in this area, we propose directions for future work. Our overarching recommendation is that researchers develop unifying frameworks to help synthesize the results of individual studies that focus on distinct aspects of globalization’s relationship to inequality

Economic Shocks and Crime: Evidence from the Brazilian Trade Liberalization

This paper studies the effect of changes in economic conditions on crime. We exploit the 1990s trade liberalization in Brazil as a natural experiment generating exogenous shocks to local economies. We document that regions exposed to larger tariff reductions experienced a temporary increase in crime following liberalization. Next, we investigate through what channels the trade-induced economic shocks may have affected crime. We show that the shocks had significant effects on potential determinants of crime, such as labor market conditions, public goods provision, and income inequality. We propose a novel framework exploiting the distinct dynamic responses of these variables to obtain bounds on the effect of labor market conditions on crime. Our results indicate that this channel accounts for 75 to 93 percent of the effect of the trade-induced shocks on crime

Economic Shocks and Crime: Evidence from the Brazilian Trade Liberalization

This paper studies the effect of changes in economic conditions on crime. We exploit the 1990s trade liberalization in Brazil as a natural experiment generating exogenous shocks to local economies. We document that regions exposed to larger tariff reductions experienced a temporary increase in crime following liberalization. Next, we investigate through what channels the trade-induced economic shocks may have affected crime. We show that the shocks had significant effects on potential determinants of crime, such as labor market conditions, public goods provision, and income inequality. We propose a novel framework exploiting the distinct dynamic responses of these variables to obtain bounds on the effect of labor market conditions on crime. Our results indicate that this channel accounts for 75 to 93 percent of the effect of the trade-induced shocks on crime

Skills, exports, and the wages of seven million Latin American workers

Los retornos a la educación y el skill premium son parámetros fundamentales en diversos campos y en debates políticos, incluyendo la literatura sobre la globalización y la desigualdad, la migración internacional y el cambio tecnológico. Este artículo explora el skill premium y su correlación con las exportaciones en América Latina, vinculando así el rendimiento de la educación a la literatura emergente sobre la estructura del comercio y el desarrollo. Utilizando los datos sobre empleo y salarios poara más de siete millones de trabajadores de dieciséis economías de América Latina, los autores estiman el rendimiento educativo nacional y el específico de cada industria y el skill premium, y estudian algunos de sus factores determinantes. La evidencia sugiere que tanto los países como las características de las industrias son importantes para explicar los retornos educativos y el skill premium. La evidencia también sugiere que la incidencia de las exportaciones dentro de las industrias, el ingreso promedio per cápita en los países y la abundancia relativa de trabajadores calificados están relacionados con las características subyacentes de las industrias y el país, que explican estos parámetros. En particular, las exportaciones sectoriales se correlacionan positivamente con el rendimiento de la educación a nivel de la industria, un resultado compatible con los últimos modelos comerciales que unían las exportaciones con los salarios y la demanda de trabajo calificado.Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS

Skills, exports, and the wages of seven million Latin American workers

Los retornos a la educación y el skill premium son parámetros fundamentales en diversos campos y en debates políticos, incluyendo la literatura sobre la globalización y la desigualdad, la migración internacional y el cambio tecnológico. Este artículo explora el skill premium y su correlación con las exportaciones en América Latina, vinculando así el rendimiento de la educación a la literatura emergente sobre la estructura del comercio y el desarrollo. Utilizando los datos sobre empleo y salarios poara más de siete millones de trabajadores de dieciséis economías de América Latina, los autores estiman el rendimiento educativo nacional y el específico de cada industria y el skill premium, y estudian algunos de sus factores determinantes. La evidencia sugiere que tanto los países como las características de las industrias son importantes para explicar los retornos educativos y el skill premium. La evidencia también sugiere que la incidencia de las exportaciones dentro de las industrias, el ingreso promedio per cápita en los países y la abundancia relativa de trabajadores calificados están relacionados con las características subyacentes de las industrias y el país, que explican estos parámetros. En particular, las exportaciones sectoriales se correlacionan positivamente con el rendimiento de la educación a nivel de la industria, un resultado compatible con los últimos modelos comerciales que unían las exportaciones con los salarios y la demanda de trabajo calificado.Centro de Estudios Distributivos, Laborales y Sociales (CEDLAS

Trade and Informality in the Presence of Labor Market Frictions and Regulations

We build an equilibrium model of a small open economy with labor market frictions and imperfectly enforced regulations. Heterogeneous firms sort into the formal or informal sector. We estimate the model using data from Brazil, and use counterfactual simulations to understand how trade affects economic outcomes in the presence of informality. We show the following: 1) Trade openness unambiguously decreases informality in the tradable sector but has ambiguous effects on aggregate informality. 2) The productivity gains from trade are understated when the informal sector is omitted. 3) Trade openness results in large welfare gains even when informality is repressed. 4) Repressing informality increases productivity but at the expense of employment and welfare. 5) The effects of trade on wage inequality are reversed when the informal sector is incorporated in the analysis. 6) The informal sector works as an “unemployment buffer” but not a “welfare buffer” in the event of negative economic shocks