Long-Run Effects of Trade Liberalization on Local Labor Markets Evidence from South Africa

This paper uses municipal-level data from South Africa for the period 1996–2011 to estimate the medium to long-run effects of trade liberalization on local labor markets. It finds that local labor markets that were more exposed to tariff cuts tended to experience slower growth in employment and income per capita than less exposed regions. The longer-term effects of trade liberalization on regional earnings are stronger than the medium-term effects, and tend to be more pronounced among municipalities that included the former homelands.


Introduction
A growing body of evidence for both developing and developed countries reveals that trade liberalization and increased import competition have significant impacts on local labor markets and regional dynamics. A series of influential papers report significant short and medium-run adverse relative e↵ects on local income and employ- Until recently, it was typically assumed that these adverse e↵ects of trade liberalization on local labor markets, although quantitatively important in the short and medium run, would tend to dissipate over longer time horizons. For example, Autor et al. (2013) argue that, as negatively impacted workers move to other sectors, retire or pass away, trade-induced wage losses or unemployment would dissipate, while the gains from trade should persist. However, this conventional wisdom has been challenged by recent evidence for Brazil. Using 25 years of administrative employment data, Dix-Carneiro and Kovak (2017) study the dynamics of local labor market adjustment following the trade liberalization in the early 1990s and find that regions facing larger tari↵ cuts experienced prolonged declines in formal sector employment and earnings relative to other regions. Surprisingly, the impact of tari↵ changes on regional earnings 20 years after liberalization was three times larger than the e↵ect observed after 10 years. These rising impacts on regional earnings are inconsistent with conventional spatial equilibrium models, which predict declining e↵ects due to spatial arbitrage. Instead, the evidence supports 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 e↵ects of liberalization, explaining the slow adjustment path of regional earnings and 1 quantitatively accounting for the magnitude of the long-run e↵ects.
While this evidence for Brazil is convincing, little is known about the extent to which these qualitative findings apply more generally to other developing countries and institutional settings. In this paper, we use municipal-level data from South Africa for the period 1996-2011 to empirically examine the medium-to long-term e↵ects of trade liberalization on local labor markets. Following the 1994 democratic elections, there was a sudden and important shift in trade policy: South Africa adopted an ambitious programme of multilateral tari↵ liberalization as part of the Uruguay Round, and concluded several regional trade agreements. As in most of the previous literature (reviewed in more detail below), the empirical analysis exploits the fact that, because of initial heterogeneity in the production structure, municipalities across South Africa were di↵erentially exposed to the sizable tari↵ reductions observed in the country after the introduction of democracy. Examining these differential regional impacts of trade liberalization is especially warranted in the South African context, where the large regional disparities associated with the homeland system imposed during the apartheid regime persisted long after the introduction of democracy (Bastos and Bottan, 2016).
The econometric results reveal that local labor markets that were more exposed to tari↵ reductions tended to experience slower growth in employment and income per capita than less exposed regions. Consistently with the findings of Dix-Carneiro and Kovak (2017), the e↵ects on income per capita observed over the period 1996-2011 tend to be considerably larger and more precisely estimated than in the period 1996-2001. These findings are robust across di↵erent definitions of local labor markets. The long-term adverse e↵ects of tari↵ cuts on relative employment and income per capita growth tend to be stronger among municipalities that included the former homelands (the territories reserved for marginalized black communities during apartheid). This result may plausibly reflect that the former homelands had little economic activity beyond subsistence agriculture and were already characterized by highly depressed 2 incomes. If a municipality that contained a former homeland was hit by a trade shock in another sector, it is less likely to be able to provide viable outside options for workers displaced by these trade shocks. Taken together, this evidence provides further support to a mechanism involving imperfect interregional labor mobility and dynamics in labor demand, driven by slow capital adjustment and agglomeration economies.
As noted above, this paper contributes to a growing literature examining the effects of import competition and tari↵ liberalization on local labor markets. Topolova (2010) exploits the 1991 Indian trade liberalization to estimate the impact of import competition on relative poverty dynamics across districts. The estimates provide evidence that rural districts in which sectors were more exposed to liberalization were concentrated experienced slower decline in poverty and lower consumption growth. States. They show that U.S. commuting zones were di↵erentially exposed to Chinese import competition because of initial heterogeneity in their production structure, and argue the transition of China to a market economy (and the consequent rise of its productivity and trade flows) may be regarded as an exogenous trade shock to those local labor markets. They find that rising import competition from China caused higher unemployment, lower labor force participation, and reduced wages in local labor markets that house import-competing manufacturing industries. Import competition is found to explain about one-quarter of the contemporaneous aggregate decline in US manufacturing employment. Transfer benefit payments for unemployment, disability, retirement and health care also rose sharply in local labor markets more exposed to import competition. In the Brazilian context, Costa et al. (2016) distinguish between the impacts of competition and demand shocks arising from rising trade with China.
3 They find that local labor markets more a↵ected by Chinese import competition experienced slower growth in manufacturing wages between 2000 and 2010. However, they also document that locations benefiting from rising Chinese commodity demand during the same period experienced faster wage growth. Hakobyan and McLaren (2017) estimate e↵ects of NAFTA on wages using US data for 1990 and 2000. They estimate the e↵ects of the agreement by industry and location, measuring each industry's exposure to Mexican imports and each locality's dependence on exposed industries. They find that tari↵ reductions reduced wage growth for blue-collar workers in the most a↵ected industries and localities. These e↵ects apply also to service-sector workers in a↵ected localities, whose jobs do not compete with imports.
Using individual-level data from South Africa for 1994-2004, Erter et al. (2019) find that workers in districts facing larger tari↵ reductions experience a significant decline in both formal and informal employment in the tradable sector, driven primarily by a decline in manufacturing employment, relative to workers in districts less exposed to these reductions. Displaced workers do not appear to have moved to other sectors or to less a↵ected regions. Instead, they are more likely to become discouraged workers or exit the labor force entirely, and show an increased probability of accessing government transfers. Using community-level data from several rounds of the South African population census, this paper extends and complements this evidence by distinguishing between medium and long-term e↵ects of trade liberalization, and examining the heterogeneity of impacts according to the presence of the former homelands. As discussed above, the evidence we document provides further support to a mechanism involving imperfect interregional labor mobility and dynamics in labor demand, driven by slow capital adjustment and agglomeration economies.
The remainder of the paper is organized as follows. Section 2 provides a brief overview of the institutional background in South Africa. Section 3 outlines the econometric method, before Section 4 presents the data and summary statistics. Section 5 reports and discusses the econometric results. Section 6 provides a discussion 4 of the policy implications. Section 7 summarizes and concludes the paper.

Institutional background
Apartheid in South Africa was enforced through legislation introduced by National Party governments that ruled the country from 1948 to 1994. The government classified inhabitants into racial groups and introduced an identity card for all adult citizens specifying their race. Each race was allotted its own territory, which was later used as a basis for forced removals. Public goods provision was segregated.  Figure 2 shows that the reduction in e↵ectively applied tari↵s was especially important in the manufacturing sector.

Econometric method
To examine the impacts of trade liberalization on local labor markets, we adopt the following econometric specification: where: Y m denotes the change in employment or income per capita of municipality m, W T m is the change in the municipality's employment-weighted tari↵, defined as the summation of sectoral tari↵ changes weighted by the initial share of labor allocated to the industry in the municipality (measured in 1996). In several specifications, we will introduce a set of demographic controls to account for changes in the composition of the population in each municipality. These include changes in total population, the percentage of male population, average age, percentage of population without education, and percentage of black/white population. We will also exploit the heterogeneity of e↵ects by municipality, depending on the presence of a former 6 homeland, the initial levels of the majority racial group, and the skill composition of the workforce. or not former homeland communities. We merged industry-level data on e↵ectively applied import tari↵s from UNCTAD TRAINS, which we used to compute municipallevel, employment-weighted average tari↵s. As our main measure, we use a simple employment-weighted average tari↵ at the municipality-sector level (using the initial share of the sector in employment of the municipality as weight), in which the sector-level average tari↵ is a simple average of import tari↵s at a more disaggregated level. As described below, we will also use an alternative employment-weighted and import-weighted tari↵. Figure 3 displays the distribution of the changes in these employment-weighted tari↵s during 1996-2011, distinguishing between municipalities that include areas from the former homelands and municipalities that do not. The figure shows that there exists significant variation in the degree to which municipalities are exposed to tari↵ cuts. It also shows that the distributions of tari↵ cuts are

Results
In this section, we present the econometric results. We first present the baseline estimates. We then report several robustness checks. Finally, we assess the heterogeneity of e↵ects across regions depending on initial attributes of the municipality. Table 2 reports the baseline estimates for the model presented in (1) and import-weighted average tari↵ for the period 1996-2011 is more than 50 percent higher than the estimate for 1996-2001. However, the di↵erence between long-run and medium-run e↵ects is not as clear for employment. The estimates based on the employment-weighted tari↵ point to larger long-term e↵ects, but the estimates using the employment-weighted and import-weighted tari↵s are fairly similar across the two periods. Table 3 reports similar estimates, but now including control variables that account for changes in the demographic composition of the population. Although the observed changes in demographics across municipalities might be partly a consequence of trade liberalization, they might also be driven by several other factors. In the latter case, the baseline estimates reported in Table 2 would be biased. To account for this concern, in Table 3 we include as controls changes in total population, the percent of male population, average age, percent of population without education and percent of black/white population. We observe that the main results remain qualitatively unchanged, although the inclusion of these controls tends to lower the magnitude of the point estimates. We also observe that the estimates in column (1)

Robustness checks
We proceed by conducting a series of checks to verify the robustness of our baseline estimates. A potential concern about the results reported above is that the di↵erential patterns we observe might be also driven by developments in the export sector, in To address this concern, in Tables 4 and 5 the mining industry was excluded from the empirical analysis. Table 4 considers the baseline specification without controls, while Table 5 includes the set of controls considered in Table 3. Reassuringly, we observe that the baseline estimates tend to remain qualitatively similar when the mining sector is excluded. In particular, we find statistically significant long term adverse e↵ects of trade liberalization on the relative growth of local employment and average earnings.
Another potential concern regards the level of aggregation at which local labor markets were defined. In the main analysis, we use the municipality as the geographic unit of analysis for identifying local labor markets. A potential concern about this approach is that these geographic units might be too small, and do not fully account for population movements within broader commuting zones. For example, some workers might live in a municipality and work in another. To account for this concern, in Table 6 we perform the analysis at the district-level, which is considerably larger than municipalities and commuting zones. There are 50 districts in South Africa, considerably fewer than the 234 municipalities considered in the main analysis. Reassuringly, the main results remain qualitatively similar. We observe significant adverse longterm e↵ects of tari↵ cuts on regional employment and earnings. The e↵ects income per capita over the period 1996-2001 are not statistically significant.

Heterogeneity of impacts
Examining the localized impacts of trade liberalization is especially warranted in the South African context, where the large regional disparities associated with the homeland system imposed during apartheid persisted long after the introduction of democracy (Bastos and Bottan, 2016). The magnitude of the e↵ects of trade liberalization on local labor markets might be expected to depend on the initial conditions of the municipality. In particular, municipalities including the former homelands might be expected to have greater di culties in adjusting to increased import competition.
The homelands had little economic activity beyond subsistence agriculture, and were already characterized by highly depressed incomes. If on top of this a municipality that contains a homeland is hit by a trade shock in another sector (e.g. in manufacturing), it might have greater di culties in providing viable outside options for workers displaced by these trade shocks. The results in Table 7 suggest that municipalities that contained a former homeland were indeed more adversely impacted by tari↵ re- In Table 8  Finally, in Tables 9 and 10 we examine di↵erential e↵ects depending on the initial skill level of the population in the municipality. In Table 9 we consider a measure of  (1) and (2)). In Table   10 we consider a measure of skill based on education, in which workers are classified as skilled if they have higher education. In each of these cases, we consider that a municipality is initially low-skilled abundant if the share of unskilled workers in 1996 is above the 50th percentile. Once again, the results in Table 10 suggest that, for the period 1996-2011, the adverse e↵ects of trade liberalization on relative employment and income per capita tend to be weaker in municipalities with a higher share of unskilled workers. The results for the period 1996-2001 are less conclusive, with insignificant di↵erential e↵ects for income per capita. 13

Discussion
Trade liberalization typically generates aggregate gains for consumer welfare. Although reduced tari↵ protection may lower relative incomes for workers in locations more exposed to the resulting rise in import competition, it generates broader gains to consumers from lower product prices or increased product variety, as well as gains to firms from having inputs at lower cost and in greater diversity ( However, easing labor market adjustment and dealing with the localized e↵ects of trade shocks may require a more comprehensive policy mix that goes beyond labor policies. The evidence reviewed above points to significant and long-lasting adverse e↵ects of import competition on relative local income and employment growth. It also points to reduced geographical mobility of labor in response to trade shocks.
Although place-based policies may help revitalize areas depressed by trade shocks and strengthen regional cohesion, it is necessary to assess the viability of such investments.
Housing policies, such as relocation allowances, may facilitate geographical mobility of displaced workers. Well-functioning financial markets may ease access to credit to help to finance education, training and entrepreneurship of displaced workers.

Concluding remarks
In this paper we have used municipal-level data from South Africa for the period 1996-2011 to empirically examine medium to long-term e↵ects on local labor markets of the tari↵ reductions observed after the introduction of democracy. We find that local labor markets that were more exposed to tari↵ cuts tend to have experienced slower growth in employment and income per capita (relative to regions less exposed to trade liberalization). The longer-term e↵ects on income per capita tend to be stronger than the shorter-term impacts. These results are robust across di↵erent definitions of local labor markets. The long-term adverse e↵ects on relative income per capita were stronger among municipalities that included the former homelands (the former territories reserved for marginalized black communities) and a higher share of the black population. Although reduced tari↵ protection may lower relative incomes for workers in locations more exposed to the resulting rise in import competition, it generates broader gains to consumer welfare. Policy options to deal with the localized e↵ects of trade shocks include general inclusive policies, such income redistribution, as well as policies seeking to facilitate worker mobility across sectors, regions and occupations.

Figure 1: Former homelands in South Africa
Notes: The shaded areas represent former homelands. The maps were generated using shape-files obtained from Statistics South Africa and The Directorate: Public State Land Support. Dashed area corresponds to Lesotho.     The table reports the effects of employment-weighted tariff changes on employment and income per capita. Data at the municipality-level. In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the municipality in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the municipality in 1996. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1 Notes: The table reports the effects of employment-weighted tariff changes on employment and income per capita. Data at the municipality-level. In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the municipality in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the municipality in 1996. Controls are: change in total population of the municipality, change in % of male population in the municipality, change in average municipality age, change in % of population without education in the municipality, change in % of black population in the municipality, change in % of white population in the municipality. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1 Notes: The table reports the effects of employment-weighted tariff changes on employment and income per capita, excluding the mining sector. Data at the municipality-level. In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the municipality in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the municipality in 1996. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1 Notes: The table reports the effects of employment-weighted tariff changes on employment and income per capita. Data at the municipality-level. In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the municipality in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the municipality in 1996. Controls are: change in total population of the municipality, change in % of male population in the municipality, change in average municipality age, change in % of population without education in the municipality, change in % of black population in the municipality, change in % of white population in the municipality. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1 Notes: The table reports the effects of employment-weighted tariff changes on employment and income per capita. Data at the district-level. In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the district in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the district in 1996. Controls are: change in total population of the municipality, change in % of male population in the district, change in average municipality age, change in % of population without education in the district, change in % of black population in the district, change in % of white population in the district. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1 Notes: The table reports the effects of employment-weighted tariff changes on employment and income per capita. Data at the municipal-level. In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the municipality in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the municipality in 1996. Controls are: change in total population of the municipality, change in % of male population in the municipality, change in average municipality age, change in % of population without education in the municipality, change in % of black population in the municipality, change in % of white population in the municipality. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1 Notes: The table reports the effects of employment-weighted tariff changes on employment and income per capita. Data at the municipal-level. In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the municipality in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the municipality in 1996. Controls are: change in total population of the municipality, change in % of male population in the municipality, change in average municipality age, change in % of population without education in the municipality, change in % of black population in the municipality, change in % of white population in the municipality. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1 Notes: The table reports the effects of employment-weighted tariff changes on employment and income per capita. Data at the municipal-level. In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the municipality in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the municipality in 1996. Controls are: change in total population of the municipality, change in % of male population in the municipality, change in average municipality age, change in % of population without education in the municipality, change in % of black population in the municipality, change in % of white population in the municipality. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1 Table 10. Interaction with dummy Unskilled=1 if initial share of unskilled population (based education level) in top 50th percentile (1) (2) (3) (4) In the first row, we first take the simple average of the tariff at the sector level, and then weight by the employment share of the sector in the municipality in 1996. In the second row, we first use industry-level imports (at a more disaggregated level) to compute the average tariff at the sector level and then weight by the employment share of the sector in the municipality in 1996. Controls are: change in total population of the municipality, change in % of male population in the municipality, change in average municipality age, change in % of population without education in the municipality, change in % of black population in the municipality, change in % of white population in the municipality. Robust standard errors in parenthesis, *** p<0.01, ** p<0.05, * p<0.1