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The impacts of trade liberalization on informal labor markets: A theoretical and empirical evaluation of the Brazilian case

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  • Paz, Lourenço S.

Abstract

Following trade liberalization, several developing countries experienced a sharp increase in the share of informal manufacturing employment. In this paper, I examine the impacts of trade liberalization on the labor markets of a small open economy, in an environment in which tariffs affect firms' payroll tax compliance decisions. I demonstrate that a reduction in domestic import tariffs reduces the average formal wage and show that the direction of the effect on the share of informal employment depends on the initial labor market conditions. A cut in trading partner import tariffs decreases the share of domestic informal employment and increases the average formal wage. I confirm the model's principal findings empirically, using data from the 1989–2001 Brazilian trade liberalization episode. I find the results robust to endogeneity and self-selection concerns, which are addressed, respectively, using instrumental variable and switching regression approaches.

Suggested Citation

  • Paz, Lourenço S., 2014. "The impacts of trade liberalization on informal labor markets: A theoretical and empirical evaluation of the Brazilian case," Journal of International Economics, Elsevier, vol. 92(2), pages 330-348.
  • Handle: RePEc:eee:inecon:v:92:y:2014:i:2:p:330-348 DOI: 10.1016/j.jinteco.2013.12.002
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    Citations

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    Cited by:

    1. Costa, Francisco & Garred, Jason & Pessoa, João Paulo, 2016. "Winners and losers from a commodities-for-manufactures trade boom," Journal of International Economics, Elsevier, pages 50-69.
    2. Emanuel Ornelas, 2016. "Special and Differential Treatment for Developing Countries," CESifo Working Paper Series 5823, CESifo Group Munich.
    3. Araújo, Bruno César & Paz, Lourenço S., 2014. "The effects of exporting on wages: An evaluation using the 1999 Brazilian exchange rate devaluation," Journal of Development Economics, Elsevier, vol. 111(C), pages 1-16.
    4. L. Alan Winters & Antonio Martuscelli, 2014. "Trade Liberalization and Poverty: What Have We Learned in a Decade?," Annual Review of Resource Economics, Annual Reviews, vol. 6(1), pages 493-512, October.
    5. Rafael Dix-Carneiro & Brian K Kovak, 2016. "Trade Liberalization and Regional Dynamics," Working Papers id:11213, eSocialSciences.
    6. Becker, Dennis, 2014. "Heterogeneous Firms and Informality: The Effects of Trade Liberalization on Labor Markets," Working Papers 180124, Cornell University, Department of Applied Economics and Management.
    7. Brian McCaig & Nina Pavcnik, 2014. "Export Markets and Labor Allocation in a Low-income Country," NBER Working Papers 20455, National Bureau of Economic Research, Inc.
    8. Almeida, Rita K. & Poole, Jennifer P., 2017. "Trade and labor reallocation with heterogeneous enforcement of labor regulations," Journal of Development Economics, Elsevier, pages 154-166.

    More about this item

    Keywords

    Brazil; Informal labor markets; Payroll tax; Trade liberalization;

    JEL classification:

    • F1 - International Economics - - Trade
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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