The General Equilibrium Wage Impact of Trade-Induced Shifts in Industrial Compositions of Employment in Brazilian Cities, 1991-2000

Conventionally, it is presumed that restructuring of industrial composition of employment only modestly affects the average wage. This is because in a partial equilibrium setting such a restructuring affects the calculation of the average wage only through changes in employment shares of industries used as weights on constant industry wages. On the contrary, this paper brings substantial evidence indicating that aside from such partial equilibrium shift-share effects, a change in industrial composition sizably impacts all industry wages through general equilibrium (G.E.) feed-backs from the average wage – as a reservation wage in all industries in a search and bargaining framework – onto all industry wages. In particular, this paper uses Brazilian census data for years 1991 and 2000 to study the G.E. wage impacts of exogenous shifts in industrial compositions in cities of Brazil induced by substantial trade liberalization in this country during the 1990s. A restructuring of industrial composition in a city favoring high-wage industries that modestly raises the average wage in this city by only 1% through shift-share accounting, is estimated here to increase all industry wages in the city in average by at least twice as much – between 2 to 4 percent – in the long-run through the G.E impacts, resulting in an overall increase of 3 to 5 percent in the average wage. Concerns about endogeneity is address by using an IV strategy that exploits distance of a city from major international commercial ports as an indicator of how the change in trade policy impacted its industrial composition. The result is also robust to correcting for sample selection bias generated by regional migrations and to the presence of alternative explanatory mechanisms. The finding here highlights the importance of considering G.E. interactions in policy evaluations. It also indicates that major changes in national industrial or trade policies in developing countries such as Brazil, with already non-uniform distribution of economic development across regions, create geographical winners and losers depending on how the impacts are distributed across different localities sub-nationally. If the distribution of impacts is such that the losers-to-be regions are those already suffering, then balancing measures are necessary to avoid spatially uneven sub-national economic development.Industrial Composition, Wage Structure, International Trade, Sub-national Economic Development, Spatial Distribution of Policy Impacts, Brazil

The General Equilibrium Wage Impact of Trade-Induced Shifts in Industrial Compositions of Employment in Brazilian Cities, 1991-2000

Conventionally, it is presumed that restructuring of industrial composition of employment only modestly affects the average wage. This is because in a partial equilibrium setting such a restructuring affects the calculation of the average wage only through changes in employment shares of industries used as weights on constant industry wages. On the contrary, this paper brings substantial evidence indicating that aside from such partial equilibrium shift-share effects, a change in industrial composition sizably impacts all industry wages through general equilibrium (G.E.) feed-backs from the average wage – as a reservation wage in all industries in a search and bargaining framework – onto all industry wages. In particular, this paper uses Brazilian census data for years 1991 and 2000 to study the G.E. wage impacts of exogenous shifts in industrial compositions in cities of Brazil induced by substantial trade liberalization in this country during the 1990s. A restructuring of industrial composition in a city favoring high-wage industries that modestly raises the average wage in this city by only 1% through shift-share accounting, is estimated here to increase all industry wages in the city in average by at least twice as much – between 2 to 4 percent – in the long-run through the G.E impacts, resulting in an overall increase of 3 to 5 percent in the average wage. Concerns about endogeneity is address by using an IV strategy that exploits distance of a city from major international commercial ports as an indicator of how the change in trade policy impacted its industrial composition. The result is also robust to correcting for sample selection bias generated by regional migrations and to the presence of alternative explanatory mechanisms. The finding here highlights the importance of considering G.E. interactions in policy evaluations. It also indicates that major changes in national industrial or trade policies in developing countries such as Brazil, with already non-uniform distribution of economic development across regions, create geographical winners and losers depending on how the impacts are distributed across different localities sub-nationally. If the distribution of impacts is such that the losers-to-be regions are those already suffering, then balancing measures are necessary to avoid spatially uneven sub-national economic development

Labour market outcomes of shifts in industrial composition in Brazil and Mexico

Conventionally, it is believed that wages are primarily determined by aggregate demand for labour, treating its industrial composition as irrelevant. E.g., while trade liberalization affects aggregate labour demand and its industrial composition by differently impacting within-industry labour demands, it is deemed to affect wages mainly through the former rather than the latter. In principle, given that industries pay differently to similar workers, compositional shifts that favour high premium industries, increase the likelihood of high-paying employment and raise the value of outside options for unemployed workers within skill-groups. Consequently, wages strategically increase in all industries. Chapters 1 and 2 explore whether after controlling for changes in aggregate demand for labour, shifts in its industrial composition play an important role in determining wages. Guided by the outcome of a general equilibrium model, exogenous, trade-induced variation in change in composition of local employment across cities in Mexico and Brazil during the 1990s is used to identify the associated causal wage effects, while controlling for changes in local demands for labour. It is found that shifts in industrial composition of local employment substantially impacts local sectoral wages. Not much is known about the reasons behind differences in self-employment rate across space. While differences in local factors might matter, such factors are also impacted by changes in self-employment rate, making identification difficult. Chapter 3 asks to what extent local wages and wage-employment rate are important in determining local self-employment rate. Building on the structure provided by a multi-city, multi-industry search and bargaining model of a labour market, the 1991 and 2000 waves of the Brazilian household census data are used to identify the long-term, causal effects of local employment rate and wages on local self-employment rate across Brazilian sub-national labour markets. Exogenous variation in local structures of wages and employment across Brazilian cities that were induced by trade liberalization of the 1990s in Brazil are used as the basis of the identification strategy. It is found that reallocation to self-employment from unemployment causally, and inversely, depends on local average wage and employment rate, and is substantially more responsive to changes in local wages.Arts, Faculty ofVancouver School of EconomicsGraduat