IZA DP No. 7358: Trade and Labor Reallocation with Heterogeneous Enforcement of Labor Regulations
This paper revisits the question of how trade openness affects labor market outcomes in a developing country setting. We explore the fact that plants face varying degrees of exposure to global markets and to the enforcement of labor market regulations, and rely on Brazil's currency crisis in 1999 as an exogenous source of variation in access to foreign markets. Using administrative data on employers matched to their employees and on the enforcement of labor regulations at the city level over Brazil's main crisis period, we document that the way trade openness affects labor market outcomes for plants and workers depends on the stringency of de facto labor market regulations. In particular, we show for Brazil, a country with strict labor market regulations, that after a trade shock, plants facing stricter enforcement of the labor law decrease job creation and increase job destruction by more than plants facing looser enforcement. Consistent with our predictions, this effect is strongest among small, labor-intensive, non-exporting plants, for which labor regulations are most binding. These findings are consistent with the hypothesis that, in the context of strict de jure labor market regulations, increased enforcement limits the plant-level productivity gains associated with increased trade openness. Therefore, increasing the flexibility of de jure regulations may allow for broader access to the gains from trade.