The Impact of Crisis-Related Changes in Trade Flows on Employment, Incomes, Regional and Sectoral Development in Brazil

The global financial crisis and the resulting drop in demand have caused unprecedented declines in world trade. This study uses the STAGE-LAB Computable General Equilibrium Model to analyse the potential impact of the trade shock associated with the global economic crisis on labour and household income in Brazil. To measure the trade shock, we use mirror data on trade with Brazil reported by the US and the European Union and define the shock as the percentage change in trade between January-April 2009 and the same period in the previous year. We consider this shock to be temporary and therefore assume that capital and land are fixed by activity. Our model assumes that high skilled labour is fully employed, while there is oversupply of labour in the market for medium skill and low skilled labour. Labour market adjustment for high skilled labour thus takes the form of wage adjustments. For low and medium skilled workers, instead, labour market adjustments lead to changes in employment levels. The Social Accounting Matrix used in our study allows us to distinguish seven regions within Brazil and we allow for the possibility that high skilled labour migrates across regions in response to wage changes. For our base case scenario we find a modest but appreciable GDP reduction of 2.1 per cent caused by reductions in trade flows during the crisis. Average returns to land and to capital increase during the period in some regions. All types of labour lose out in the crisis, with low and medium skilled labour losing more than high skilled labour.