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The “Big Push“ of International Trade: A Tale of Informality and Human Capital

Author

Listed:
  • Francesco D’Ascanio

    (University of Hohenheim)

  • Tomás R. Martinez

    (Insper)

Abstract

Informality is pervasive in many developing economies and is often accompanied by lowinvestment in human capital. We study the effects of international trade through the lens of a model with heterogeneous firms and workers, featuring labor market frictions. Complementarity between workers’ human capital investment decisions and firms’ hiring strategies can give rise to multiple equilibria. In the “bad†equilibrium, informality have stronger incentives to formalize and workers invest more in human capital. We show that, under certain conditions, trade can act as a coordinating device that shifts the economy toward the good equilibrium. The novel mechanism we uncover involves effort in human capital investment as a key margin of adjustment to trade shocks.

Suggested Citation

  • Francesco D’Ascanio & Tomás R. Martinez, 2026. "The “Big Push“ of International Trade: A Tale of Informality and Human Capital," Bank of Lithuania Working Paper Series 139, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:139
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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