Employment Responses to Global Markets

University Of California-San Diego, La Jolla CA

Investigators

Abstract

The project will model and trace the responses of individual workers and firms to changes in the global economic environment. To this end, the project will use an extensive and unusually rich matched data set on identified firms and identified employees between 1986 and 2001 for Brazil. The worker data offer wage information and monthly employment records, and include detailed demographic information on the employees at establishments of all formally established Brazilian firms, along with information on the reasons for hires, the occupations filled, and causes for separations. Using tax identifiers, these worker records were matched to a sample of manufacturing firms for which detailed information on balance-sheet figures, investments, foreign factor uses, exports, and exits are available. Brazil's large-scale trade liberalization in 1990 and a 60-percent exchange rate devaluation in January 1999 provide salient variation in world market exposure. Resulting changes in foreign competition, and contemporaneous technical changes among Brazilian manufactur- ing firms, were accompanied by substantial labor displacements. Pilot research suggests that layoffs and hires are significantly related to trade exposure. However, contrary to classic and modern trade theory or frictionless macroeconomic models, resulting displacements can lead to extended delays before rehiring and long adjustment periods before firms with an individ- ual or sectoral comparative advantage start to absorb displaced workers. Objectives and intellectual merit. The project aims to illuminate workers' varying interac- tions with firms during employment and after separations and to explore the consequences of Brazil's exposure to world markets for its labor market performance. Together with co- authors, the grantee will investigate labor reallocations in response to Brazil's trade liberal- ization in 1990, analyze the returns to skills in the presence of endogenous switching between jobs and under changing world market exposure, evaluate the earnings effects of induced displacements, and assessmacroeconomic shock propagation through worker separation and imperfect re-contracting. Beyond prior assessments of output market share reallocations and labor turnover statis- tics, data of the present project allow the grantee to trace flows between types of firms within and across sectors, and to estimate at the individual worker level separation risks, rehiring likelihoods and subsequent earnings. The project will elucidate at what time horizon a lib- eralizing economy can expect factor markets to successfully reallocate resources according to comparative advantage, whether this process is associated with transitory or permanent earnings losses for workers with certain characteristics, and how the transition process might be alleviated through targeted reforms. Broader impact. The public debate across industrialized and developing countries alike ex- hibits much concern with the impact of global integration on domestic labor markets. The expansion of world trade raises fears that jobs at all skill levels become increasingly sub- stitutable across locations. This project on Brazil's labor market performance contributes to the understanding of employment responses to global change in offering adequate matched employer-employee data for detailed econometric analysis. Findings will be relevant to the conduct of trade policy in countries that contemplate further liberalization, and can inform the design of labor market instruments comparable to the U.S. Trade Adjustment Assistance.