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Alessandro Ruggieri, UAB Print
Friday, 30 November 2018, 11:15 - 12:15

Alessandro Ruggieri, UAB

Trade and Labor Market Institutions: A Tale of Two Trade Liberalizations

Abstract : In this paper I study how labor market institutions at the time of a trade reform determine the post-reform dynamics of unemployment. I first document that for a large group of developing countries (1) unemployment increases on average following a trade reform, (2) there are significant cross-country differences in unemployment response, and (3) cross-country variation in the labor market institutions in place at the time of the reform can account for the observed unemployment changes. I interpret this evidence through the lens of a model of international trade, featuring heterogeneous firms, endogenous industry dynamics, search and matching frictions in the labor market and duality between formal and informal employment. I estimate the model to match the pre-liberalization firm dynamics in Colombia and Mexico, two countries that differed by the labor regulations in place at the time of trade liberalization, and I characterize numerically the full transition path towards the new steady state. I show that the dynamic response of unemployment to a reduction in trade costs is non-linear across different combinations of labor market institutions in place at the time of the reform. Consistent with the cross-country evidence, the response is stronger and more persistent when the firing costs are lower and the statutory minimum wage and unemployment benefits are larger. On average, these three institutions together account for up to 58 percent of the increase in unemployment in the case of Mexico, and up to 32 percent in the case of Colombia. 

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