Dix-Carneiro, RafaelKovak, Brian K.2015-03-302015-03-302015-03https://hdl.handle.net/10986/21644This paper empirically studies the dynamics of labor market adjustment following the Brazilian trade reform of the 1990s. The paper uses variation in industry-specific tariff cuts interacted with initial regional industry mix to measure trade-induced local labor demand shocks and examines regional and individual labor market responses to those one-time shocks over two decades. Contrary to conventional wisdom, the analysis does not find that the impact of local shocks is dissipated over time through wage-equalizing migration. Instead, it finds 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, the paper documents rich margins of adjustment induced by the trade reform at the regional and individual levels. 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.en-USCC BY 3.0 IGOtrade liberalizationtransitional dynamicsindustry wagesjobsemploymenthousehold surveyemployment raterightsexport marketsaccountingwage gapproductionearnings regressionsskilled workersemployment shareinformal sectorminimum wageincomeprotected industryperfect competitionlabor allocationexchangeinformationlabor forcepolitical economyjobeffectsincentiveslabor economicstrade reformslabor statisticsfactors of productionretail tradelabor market policiesfree tradewage growthdeveloping countrydomestic workerslabor markettrainingdevelopment economicsunemployed workersindustry wageworkeroutputsjob informationproductivityunemployedattritionprogram consistingadjustment processfinancial institutionsformal labor marketjob marketmarketsorganizationshousehold surveysopen economyunemployment insurancelaborearnings growthliberalizationminimum wagesunemploymentskill premiumfactor marketshuman capitalformal sector workersprevious workworkersjob destruction ratesdisplaced workerswagespoliciesinformal labor marketsinternational tradebarrierslocal labor marketsreal wagelabor demandvaluecross-sectional dataplant sizepaying joblabor studieswage premiumlabor adjustmentoccupationprivate servicesincome distributionemployment statusearnings regressionlabor market outcomesemployment growthjob creationlabor mobilityhigh wageformal sector wageseconomic theorytrade liberalizationworker heterogeneityeconomicsleather industriesinsurancewage structuremanufacturing industriestradejob destructionpension accounttheoryworking conditionsinvestmentcontractinglabor market regulationslaborerssupplyforeign workersemployeeemployment dynamicslabor supplylabor market adjustmentconsumer price indexworld tradeinformal employmentlocal labor marketunskilled workersarbitragelabourcapital investmentlabor marketseconomic shocksoutcomespriceslabor regulationslabor reallocationemployeesWorking PaperWorld Bank10.1596/1813-9450-7205