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Trade and Labor Reallocation with Heterogeneous Enforcement of Labor Regulations

  • Almeida, Rita K.

    ()

    (World Bank)

  • Poole, Jennifer P.

    ()

    (University of California, Santa Cruz)

This paper revisits the question of how trade openness affects labor market outcomes in a developing country setting. We explore the fact that plants face varying degrees of exposure to global markets and 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 matched to their employees and on the enforcement of labor regulations at the city level over Brazil's main crisis period, we document that the way trade openness affects labor market outcomes for plants and workers depends on the stringency of de facto labor market regulations. In particular, we show for Brazil, a country with strict labor market regulations, that after a trade shock, plants facing stricter enforcement of the labor law decrease job creation and increase job destruction by more than plants facing looser enforcement. Consistent with our predictions, this effect is strongest among small, labor-intensive, non-exporting plants, for which labor regulations are most binding. 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 increased trade openness. Therefore, increasing the flexibility of de jure regulations may allow for broader access to the gains from trade.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7358.

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Length: 55 pages
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7358
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  1. Moreira, Mauricio Mesquita & Correa, Paulo Guilherme, 1998. "A first look at the impacts of trade liberalization on Brazilian manufacturing industry," World Development, Elsevier, vol. 26(10), pages 1859-1874, October.
  2. Naércio Aquino Menezes-Filho & Marc-Andreas Muendler, 2011. "Labor Reallocation in Response to Trade Reform," NBER Working Papers 17372, National Bureau of Economic Research, Inc.
  3. Woodcock, Simon, 2006. "Match Effects," MPRA Paper 154, University Library of Munich, Germany.
  4. Gonzaga, Gustavo & Menezes Filho, Naércio Aquino & Terra, Maria Cristina T., 2005. "Trade Liberalization and the Evolution of Skill Earnings Differentials in Brazil," Economics Working Papers (Ensaios Economicos da EPGE) 585, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  5. Pravin Krishna & Jennifer P. Poole & Mine Zeynep Senses, 2011. "Wage Effects of Trade Reform with Endogenous Worker Mobility," NBER Working Papers 17256, National Bureau of Economic Research, Inc.
  6. Pablo D. Fajgelbaum, 2013. "Labor Market Frictions, Firm Growth, and International Trade," NBER Working Papers 19492, National Bureau of Economic Research, Inc.
  7. Kaplan, David S., 2009. "Job creation and labor reform in Latin America," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 91-105, March.
  8. Robert C. Feenstra & Robert E. Lipsey & Haiyan Deng & Alyson C. Ma & Hengyong Mo, 2005. "World Trade Flows: 1962-2000," NBER Working Papers 11040, National Bureau of Economic Research, Inc.
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