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Trade Liberalization and Regional Dynamics

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  • Rafael Dix-Carneiro
  • Brian K Kovak

Abstract

We study the evolution of trade liberalization’s effects on local labor markets, following Brazil’s early 1990s trade liberalization. Regions that initially specialized in industries facing larger tariff cuts experienced prolonged declines in formal sector employment and earnings relative to other regions. The impact of tariff changes on regional earnings 20 years after liberalization was three times the size of the effect 10 years after liberalization. These findings are robust to a variety of alternative specifications and to controlling for a wide array of postliberalization shocks. The pattern of increasing effects on regional earnings is not consistent with conventional spatial equilibrium models, which predict that effect magnitudes decline over time due to spatial arbitrage. We investigate potential mechanisms, finding empirical support for a mechanism involving imperfect interregional labor mobility and dynamics in labor demand, driven by slow capital adjustment and agglomeration economies. This mechanism gradually amplifies the initial labor demand shock resulting from liberalization. We show that the mechanism explains the slow adjustment path of regional earnings and quantitatively accounts for the magnitude of the long-run effects. [Working Paper No. 488].

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  • Rafael Dix-Carneiro & Brian K Kovak, 2016. "Trade Liberalization and Regional Dynamics," Working Papers id:11213, eSocialSciences.
  • Handle: RePEc:ess:wpaper:id:11213
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    More about this item

    Keywords

    Trade Liberalization; Regional Effects; Transitional Dynamics; regional earnings; capital adjustment; economies; regional dynamics; labor demand; mobility;
    All these keywords.

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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