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The Response of the Informal Sector to Trade Liberalization

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Author Info
Goldberg, Pinelopi Koujianou
Pavcnik, Nina

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3874.

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Date of creation: Apr 2003
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Handle: RePEc:cpr:ceprdp:3874

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Related research
Keywords: brazil; colombia; informal sector; labour market regulation; trade policy;

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Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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  1. Adriana D. Kugler, 1999. "The Impact of Firing Costs on Turnover and Unemployment: Evidence from the Colombian Labour Market Reform," Economics Working Papers 388, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  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. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
  4. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2003. "Trade, Wages and the Political Economy of Trade Protection: Evidence from the Colombian Trade Reforms," CEPR Discussion Papers 3877, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
  6. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. 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. [Downloadable!] (restricted)
  8. 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.
  9. Jeremy I. Bulow & Lawrence H. Summers, 1986. "A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination and Keynesian Unemployment," NBER Working Papers 1666, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. James J. Heckman & Carmen Pages, 2000. "The Cost of Job Security Regulation: Evidence from Latin American Labor Markets," NBER Working Papers 7773, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Orazio Attanasio & Pinelopi Goldberg & Nina Pavcnik, 2003. "Trade Reforms and Wage Inequiality in Colombia," NBER Working Papers 9830, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Arbache, Jorge Saba & Carneiro, Francisco Galrao, 1999. "Unions and Interindustry Wage Differentials," World Development, Elsevier, vol. 27(10), pages 1875-1883, October. [Downloadable!] (restricted)
  13. 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. [Downloadable!]
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