The Impacts of Trade Liberalization on Informal Labor Markets.�

Paz, Lourenco (2012): The Impacts of Trade Liberalization on Informal Labor Markets.�.

Abstract

Following trade liberalization, several developing countries experienced a sharp increase in the share of informal manufacturing employment. In this paper, I examine the impacts of trade liberalization on the labor markets of a small open economy, in an environment in which tariffs affect firms' payroll tax compliance decisions. I demonstrate that a reduction in domestic import tariffs reduces the average formal wage and show that the direction of the effect on the share of informal employment depends on the initial labor market conditions. A cut in trading partner import tariffs decreases the share of domestic informal employment and increases the average formal wage. I confirm the model's principal findings empirically, using data from the 1989--2001 Brazilian trade liberalization episode. I find the results robust to endogeneity and self-selection concerns, which are addressed, respectively, using instrumental variable and switching regression approaches.

• Item Type: MPRA Paper
• Language: English
• Keywords: Brazil; informal labor markets; payroll tax evasion; trade liberalization
• Subjects: F - International Economics > F1 - Trade > F16 - Trade and Labor Market Interactions; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance

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