Trade Liberalization and Regional Dynamics

95 Pages Posted: 9 Jan 2017  

Rafael Dix-Carneiro

Duke University

Brian K. Kovak

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2016

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 post-liberalization 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.

Suggested Citation

Dix-Carneiro, Rafael and Kovak, Brian K., Trade Liberalization and Regional Dynamics (August 1, 2016). Economic Research Initiatives at Duke (ERID) Working Paper No. 241. Available at SSRN: https://ssrn.com/abstract=2895106

Rafael Dix-Carneiro (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Brian K. Kovak

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States

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