Trade Liberalization and Regional Dynamics

TLDR

The increasing effects on regional earnings contradict conventional spatial equilibrium models that predict declining effects due to spatial arbitrage. We study how trade liberalization affects Brazilian local labor markets and investigate mechanisms such as imperfect interregional labor mobility and slow capital adjustment. The study examines a mechanism involving imperfect interregional labor mobility, slow capital adjustment, and agglomeration economies that amplify liberalization effects. Regions with larger tariff cuts experienced prolonged declines in formal sector employment and earnings, with the impact on regional earnings 20 years after liberalization being three times that after 10 years, and the proposed mechanism explains the slow adjustment and magnitude of long‑run effects. JEL codes: F16, J23, J31, J61, O15, O19, R23.

Abstract

We study the evolution of trade liberalization's effects on Brazilian local labor markets. Regions 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 effect after 10 years. These increasing effects on regional earnings are inconsistent with conventional spatial equilibrium models, which predict declining effects 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 effects of liberalization, explaining the slow adjustment path of regional earnings and quantitatively accounting for the magnitude of the long-run effects. (JEL F16, J23, J31, J61, O15, O19, R23)