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Firm entry and exit, labor demand, and trade reform : evidence from Chile and Colombia

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  • Fajnzylber, Pablo
  • Maloney, William F.
  • Ribeiro, Eduardo

Abstract

There are increasing fears that trade reform - and globalization generally - will increase the uncertainty the average (especially less skilled) worker faces. If product markets become more competitive and the access to foreign inputs is increased, will demand for workers among existing firms become more elastic? Will labor markets become more volatile because bad shocks to output will translate into greater impacts on wages and employment? So far the literature on this question has focused almost entirely on labor demand within continuing firms. But much of the movement in the job market arises from the entry and exit of firms. The authors show that firms entering and exiting a market contribute almost as much to employment changes as firms continuing in a market. In several samples, firms entering and exiting affected the net change in-positions more than the expansion of continuing plants did, although contributions varied greatly across the business cycle and period of adjustment. Estimates of labor demand elasticities of entering and exiting firms were surprisingly similar in Chile and Colombia and somewhat higher than elasticities for firms that survived. Estimates of the effect of trade liberalization offer only ambiguous lessons on trade reform's probable impact on these elasticities. The data suggest that in Chile greater exchange rate protection does reduce the wage-employment elasticity of entering and exiting plants, but the results are reversed in Colombia's case. Moreover, in Colombia higher import penetration lowers the elasticity of labor demand and in Chile higher tariffs increase it. These findings,combined with very ambiguous results from probit regressions on the determinants of plant exit, suggest that circumspection is warranted in asserting that trade liberalization will increase the wage elasticity of labor demand.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2659.

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Date of creation: 31 Aug 2001
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Handle: RePEc:wbk:wbrwps:2659

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Keywords: Economic Theory&Research; Environmental Economics&Policies; Municipal Financial Management; Labor Policies; Banks&Banking Reform; Environmental Economics&Policies; Economic Theory&Research; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Banks&Banking Reform; Municipal Financial Management;

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References

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  1. Dunne, T. & Roberts, M.J. & Samuelson L., 1988. "Plant Turnover And Gross Employment Flows In The U.S. Manufacturing Sector," Papers 9-87-7, Pennsylvania State - Department of Economics.
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  8. Garibaldi, Pietro, 1998. "Job flow dynamics and firing restrictions," European Economic Review, Elsevier, vol. 42(2), pages 245-275, February.
  9. Levinsohn, James, 1999. "Employment responses to international liberalization in Chile," Journal of International Economics, Elsevier, vol. 47(2), pages 321-344, April.
  10. Steven J. Davis & John C. Haltiwanger & Scott Schuh, 1998. "Job Creation and Destruction," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262540932, December.
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Cited by:
  1. David Greenstreet, 2007. "Exploiting Sequential Learning to Estimate Establishment-Level Productivity Dynamics and Decision Rules," Economics Series Working Papers 345, University of Oxford, Department of Economics.
  2. Eduardo Pontual Ribeiro & Carlos Corseuil & Daniel Santos & Paulo Furtado & Brunu Amorim & Luciana Servo & Andre Souza, 2004. "Trade liberalization, the exchange rate and job flows in Brazil," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 7(4), pages 209-223.
  3. Carmen Elisa Flórez, 2002. "The Function Of The Urban Informal Sector In Employment," DOCUMENTOS CEDE 006883, UNIVERSIDAD DE LOS ANDES-CEDE.
  4. Eduardo Pontual Ribeiro & Carlos H. Corseuil & Daniel Santos & Paulo Furtado & Brunu Amorim & Luciana Servo & André Souza, 2004. "Trade Liberalization, The Exchange Rate And Job And Worker Flows In Brazil," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 153, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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