Trade Liberalization and Regional Dynamics

We study the evolution of trade liberalization's effects on Brazilian local labor markets. Regions facing larger tariff cuts experienced prolonged declines informal sector employment and earnings relative to other regions. The impact of tariff changes on regional earnings 20 years after liberal...

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Bibliographic Details
Published in:The American economic review 2017-10, Vol.107 (10), p.2908-2946
Main Authors: Dix-Carneiro, Rafael, Kovak, Brian K.
Format: Article
Language:English
Subjects:
Adjustment
Earnings
Economic liberalization
Economic models
Employment
Equilibrium
Imports
Labor demand
Labor market
Labor markets
Labor migration
Liberalization
Mobility
Tariff reductions
Tariffs
Trade liberalization
Trade regionalization
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Summary:We study the evolution of trade liberalization's effects on Brazilian local labor markets. Regions facing larger tariff cuts experienced prolonged declines informal sector employment and earnings relative to other regions. The impact of tariff changes on regional earnings 20 years after liberalization was three times the effect after 10 years. These increasing effects on regional earnings are inconsistent with conventional spatial equilibrium models, which predict declining effects 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 effects of liberalization, explaining the slow adjustment path of regional earnings and quantitatively accounting for the magnitude of the long-run effects.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.20161214