Trade and labor reallocation with heterogeneous enforcement of labor regulations

This paper revisits the question of how trade affects labor market outcomes in a developing country setting. We explore the fact that plants face varying degrees of exposure to the enforcement of labor market regulations, and rely on Brazil's currency crisis in 1999 as an exogenous source of variation in access to foreign markets. Using administrative data on employers and their employees, and on the enforcement of labor regulations at the city level over Brazil's crisis period, we document that the way a currency shock affects employment depends on the stringency of de facto labor market regulations. In particular, we show for Brazil, a country with strict de jure labor regulation, that after a depreciation, plants facing stricter enforcement of the labor law increase employment by less than plants facing looser enforcement. These findings are consistent with the hypothesis that, in the context of strict de jure labor market regulations, increased enforcement limits the plant-level productivity gains associated with a more global market. Therefore, increasing the flexibility of de jure regulations may allow for broader access to the gains from trade.