Trade Liberalization and Regional Dynamics

Abstract

We study the evolution of trade liberalization's effects on local labor markets, following Brazil's early 1990s trade liberalization. Regions that initially specialized in industries facing larger tariff cuts experienced prolonged declines in formal sector employment and earnings relative to other regions. The impact of tariff changes on regional earnings 20 years after liberalization was three times the size of the effect 10 years after liberalization. These findings are robust to a variety of alternative specifications and to controlling for a wide array of postliberalization shocks. The pattern of increasing effects on regional earnings is not consistent with conventional spatial equilibrium models, which predict that effect magnitudes decline over time due to spatial arbitrage. We investigate potential mechanisms, finding empirical support for a mechanism involving imperfect interregional labor mobility and dynamics in labor demand, driven by slow capital adjustment and agglomeration economies. This mechanism gradually amplifies the initial labor demand shock resulting from liberalization. We show that the mechanism explains the slow adjustment path of regional earnings and quantitatively accounts for the magnitude of the long-run effects.

Trade and labor markets: Lessons from China’s rise

“…The US-based evidence above indicates that the adjustment process can be sluggish, unfolding over a decade or longer. Recent work studying the labor market effects of Brazil's rapid reduction in import tariffs in the early 1990s presents an even more troubling picture: alongside slow adjustment, the long-term consequences may include permanently lower productivity, earnings, and formal sector employment in more trade-exposed regions [12]. If this finding bears up broadly-and it is premature to say whether it will do so-it adds urgency to understanding why trade-exposed areas tend not to fully rebound, and to exploring the set of policies and local conditions that can improve the speed and extent of rebound.…”

Does Informal Employment Respond to Growth Opportunities? Trade-Based Evidence from Bangladesh

“…We then calculated the Leontief inverse and applied it to exports to calculate both direct and total demand, as described in Section 2.1. 7 For the instrumental variables analysis, we performed a similar analysis using Indian exports to the OECD, along with the Indian IO table. Table 1 shows that between 2002 and 2013, Bangladesh's exports to the OECD (in 2010 US$) grew substantially, from 5.9 billion to 19.7 billion.…”

“…We do this to account for the fact that the structure of inter-industry linkages might react endogenously in response to changes in exports. 7 To take a concrete example: In 2007, the total supply of wheat cultivation in Bangladesh was 46,960 million Taka. Of this total, input use from other sectors was 9,624 million Taka: 4,434 million from wheat cultivation, 67 million from livestock rearing, 926 million from fertilisers, 391 million from petroleum refining, 77 million from machinery and equipments, 60 million from electricity and water generation, 787 million from wholesale trade, 1406 million from retail trade, 105 million from water transport, 1101 million from land transport, 16 million from railway transport, 4 million from public administration and defense, 11 million from bank insurance and real estate, 1 million from professional services and 238 million from other services.…”

“…In the next section, we consider how the increases in employment types compare with one another, by examining how trade exposure affects a given individual's probability of employment in each category. Table 4 presents the results of the individual-level regressions shown in Equation 7. As in Table 3, we show both the OLS and the IV results.…”

Dynamic Responses to Immigration

“…Methodologically, this paper is related to a series of papers which estimate dynamic equilibrium models of occupation or industry choice (Lee (2005), Lee and Wolpin (2006), Johnson and Keane (2013), Dix-Carneiro (2014), Ashournia (2017), Llull (2017) and Traiberman (2017)). Within this literature, this paper is closest to Llull (2017) in terms of focus.…”