Trade Liberalization and Labor Market Dynamics

TLDR

The study estimates a structural dynamic equilibrium model of Brazil’s labor market to analyze trade‑induced transitional dynamics. The model incorporates a multi‑sector, overlapping‑generation framework with heterogeneous workers, endogenous sector‑specific experience accumulation, and costly sector switching. Estimated mobility costs range from 1.4 to 2.7 times wages with high dispersion, imperfect transferability of sector experience creates additional barriers, and counterfactual experiments show a sizable but slow labor‑market response to trade liberalization, reduced aggregate welfare gains, and effects that vary with initial sector, worker age, education, and capital mobility assumptions.

Abstract

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.