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The response of the informal sector to trade liberalization

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  • Koujianou Goldberg, Pinelopi
  • Pavcnik, Nina

Abstract

This Paper studies the relationship between trade liberalization and informality. It is often claimed that increased foreign competition in developing countries leads to an expansion of the informal sector, defined as the sector that does not comply with labour market legislation. Using data from two countries that experienced large trade barrier reductions in the 1980’s and 1990’s - Brazil and Colombia - we examine the response of the informal sector to liberalization. In Brazil, we find no evidence of a relationship between trade policy and informality. In Colombia, we do find evidence of such a relationship, but only for the period preceding a major labour market reform that increased the flexibility of the Colombian labour market. These results point to the significance of labour market institutions in assessing the effects of trade policy on the labour market.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 72 (2003)
Issue (Month): 2 (December)
Pages: 463-496

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Handle: RePEc:eee:deveco:v:72:y:2003:i:2:p:463-496

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  1. Adriana Kugler, 1999. "The Impact of Firing Costs on Turnover and Unemployment: Evidence from the Colombian Labour Market Reform," International Tax and Public Finance, Springer, vol. 6(3), pages 389-410, August.
  2. John P. Haisken-DeNew & Christoph M. Schmidt, . "Inter-Industry and Inter-Region Differentials: Mechanics and Interpretation," Working Papers 9504, SELAPO Center for Human Resources.
  3. Orazio Attanasio & Pinelopi Goldberg & Nina Pavcnik, 2003. "Trade Reforms and Wage Inequiality in Colombia," NBER Working Papers 9830, National Bureau of Economic Research, Inc.
  4. Krueger, Alan B & Summers, Lawrence H, 1988. "Efficiency Wages and the Inter-industry Wage Structure," Econometrica, Econometric Society, vol. 56(2), pages 259-93, March.
  5. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2005. "Trade, wages, and the political economy of trade protection: evidence from the Colombian trade reforms," Journal of International Economics, Elsevier, vol. 66(1), pages 75-105, May.
  6. Carmen Pagés-Serra & James J. Heckman, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," Research Department Publications 4227, Inter-American Development Bank, Research Department.
  7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  8. Bulow, Jeremy I & Summers, Lawrence H, 1986. "A Theory of Dual Labor Markets with Application to Industrial Policy,Discrimination, and Keynesian Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 376-414, July.
  9. Harrison, Ann E & Leamer, Edward, 1997. "Labor Markets in Developing Countries: An Agenda for Research," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S1-19, July.
  10. Arbache, Jorge Saba & Carneiro, Francisco Galrao, 1999. "Unions and Interindustry Wage Differentials," World Development, Elsevier, vol. 27(10), pages 1875-1883, October.
  11. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc.
  12. Pavcnik, Nina & Blom, Andreas & Goldberg, Pinelopi & Schady, Norbert, 2003. "Trade liberalization and labor market adjustment in Brazil," Policy Research Working Paper Series 2982, The World Bank.
  13. Edwards, Sebastian, 1988. "Terms of Trade, Tariffs, and Labor Market Adjustment in Developing Countries," World Bank Economic Review, World Bank Group, vol. 2(2), pages 165-85, May.
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