Firm Entry and Exit, Labor Demand, and Trade Reform: Evidence from Chile and Colombia

34 Pages Posted: 20 Apr 2016

See all articles by Pablo Fajnzylber

Pablo Fajnzylber

World Bank - Economic Development Institute; Federal University of Minas Gerais

William F. Maloney

World Bank - Poverty and Economic Management Unit; IZA Institute of Labor Economics; World Bank - Development Research Group (DECRG)

Eduardo P. Ribeiro

Federal University of Rio Grande do Sul - UFRGS

Date Written: August 2001

Abstract

Firms entering and exiting a market contribute almost as much to employment changes as firms continuing in a market. As much effort should be made to understanding sensitivity to wage changes in entering and exiting firms as to understanding wage elasticities in continuing firms.

There are increasing fears that trade reform - and globalization generally - will increase the uncertainty the average (especially less skilled) worker faces. If product markets become more competitive and the access to foreign inputs is increased, will demand for workers among existing firms become more elastic? Will labor markets become more volatile because bad shocks to output will translate into greater impacts on wages and employment?

So far the literature on this question has focused almost entirely on labor demand within continuing firms. But much of the movement in the job market arises from the entry and exit of firms.

Fajnzylber, Maloney, and Ribeiro show that firms entering and exiting a market contribute almost as much to employment changes as firms continuing in a market. In several samples, firms entering and exiting affected the net change in positions more than the expansion of continuing plants did, although contributions varied greatly across the business cycle and period of adjustment.

Estimates of labor demand elasticities of entering and exiting firms were surprisingly similar in Chile and Colombia and somewhat higher than elasticities for firms that survived.

Estimates of the effect of trade liberalization offer only ambiguous lessons on trade reform's probable impact on these elasticities. The data suggest that in Chile greater exchange rate protection does reduce the wage-employment elasticitiy of entering and exiting plants, but the opposite effect is found for continuing plants. And the results are reversed in Colombia's case.

Moreover, in Colombia higher import penetration lowers the elasticity of labor demand and in Chile higher tariffs increase it.

These findings, combined with very ambiguous results from probit regressions on the determinants of plant exit, suggest that circumspection is warranted in asserting that trade liberalization will increase the wage elasticity of labor demand.

This paper - a product of the Poverty Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to study the impact of liberalization on labor market risk. The authors may be contacted at pablo@cedeplov.ufmg.br or wmaloney@worldbank.org.

Suggested Citation

Fajnzylber, Pablo R. and Maloney, William F. and Ribeiro, Eduardo P., Firm Entry and Exit, Labor Demand, and Trade Reform: Evidence from Chile and Colombia (August 2001). World Bank Policy Research Working Paper No. 2659. Available at SSRN: https://ssrn.com/abstract=632727

Pablo R. Fajnzylber

World Bank - Economic Development Institute ( email )

1818 H Street
Washington, DC 20433
United States

Federal University of Minas Gerais ( email )

Rua Curitiba, 832
CEDEPLAR 9 Andar
MG30170-120 Belo Horizonte
Brazil
+55 31 32799162 (Phone)

William F. Maloney

World Bank - Poverty and Economic Management Unit ( email )

1818 H Street NW
Washington, DC 20433
United States
202-473-6340 (Phone)
202-522-0054 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Eduardo P. Ribeiro (Contact Author)

Federal University of Rio Grande do Sul - UFRGS ( email )

Rio Grande do Sul
Graduate Program in Economics - PPGE Av. Joao Pessoa, 52, sala 33b
Porto Alegre 90040-000
Brazil
55 51 3316 3440 (Phone)
55 51 3316 3507 (Fax)

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