Econometrica: May 2014, Volume 82, Issue 3

Trade Liberalization and Labor Market Dynamics

https://doi.org/10.3982/ECTA10457
p. 825-885

Rafael Dix‐Carneiro

This paper estimates a structural dynamic equilibrium model of the Brazilian labor market in order to study trade‐induced transitional dynamics. The model features a multi‐sector economy with overlapping generations, heterogeneous workers, endogenous accumulation of sector‐specific experience, and costly switching of sectors. The model's estimates yield median costs of mobility ranging from 1.4 to 2.7 times annual average wages, but a high dispersion of these costs across the population. In addition, sector‐specific experience is imperfectly transferable across sectors, leading to additional barriers to mobility. Using the estimated model for counterfactual trade liberalization experiments, the main findings are: (1) there is a large labor market response following trade liberalization but the transition may take several years; (2) potential aggregate welfare gains are significantly reduced due to the delayed adjustment; (3) trade‐induced welfare effects depend on initial sector of employment and on worker demographics such as age and education. The experiments also highlight the sensitivity of the transitional dynamics with respect to assumptions regarding the mobility of capital.

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Supplement to "Trade Liberalization and Labor Market Dynamics"

This web appendix presents additional details and analyses which complement the main paper.  The reader will find details regarding the estimation procedure, including how standard errors were computed.  The reader will also find goodness of fit analyses and simulations that complement those in the main paper.  Finally, the web appendix describes how sectors were defined and provides a brief analysis of reallocation following Brazilian trade reform, which corroborates previously published results.

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Supplement to "Trade Liberalization and Labor Market Dynamics"

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