Adjusting to Transitory Shocks : Worker Impact, Firm Channels, and (Lack of) Income Support

This paper estimates worker and firm impacts of foreign shocks, and the income support providedby assistance programs. It exploits quasi-experimental variation in firms’ foreign demand resulting from the globalfinancial crisis, using employer-employee data for Brazil in 2004-2017, linked with firm customs and financial data, andadministrative data covering the universe of cash transfer, unemployment insurance, and training beneficiaries. Negativeemployment effects take over a decade to dissipate fully, wage effects persist, and firm restructuring involvesoccupational adjustment, increasing permanently skilled workers while reducing unskilled workers. Brazilian workerssuffer smaller employment losses in highly informal locations and concentrated sectors. Underlying laborscarring is firm scarring caused by selection (exit) and (revenue, employment and productivity) downsizing.Unemployment insurance and cash transfers yield limited wage loss replacement (6 percent). Training does not increase.The evidence shows that a temporary shock induces persistent effects: firm restructuring scars incumbent workers andincreases long-run inequality. Firm scarring may be even more severe in less flexible labor markets. Using data fromEcuador, analysis finds that firms do not adjust workforce composition, but they permanently reduce capital whichincreases scarring.