The Response of the Informal Sector to Trade Liberalization

Pinelopi Koujianou Goldberg · Nina Pavcnik

139 citations0/0 files storedNational Bureau of Economic Research

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Global trade and economics Taxation and Compliance Studies Education and Labor Relations

Abstract

This paper studies the relationship between trade liberalization and informality.It is often claimed that increased foreign competition in developing countries leads to an expansion of the informal sector, defined as the sector that does not comply with labor market legislation.Using data from two countries that experienced large trade barrier reductions in the 1980's and 1990's, Brazil and Colombia, we examine the response of the informal sector to liberalization.In Brazil, we find no evidence of a relationship between trade policy and informality.In Colombia, we do find evidence of such a relationship, but only for the period preceding a major labor market reform that increased the flexibility of the Colombian labor market.These results point to the significance of labor market institutions in assessing the effects of trade policy on the labor market.

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References

1986Equilibrium Unemployment as a Worker Discipline Device 1988Efficiency Wages and the Inter-Industry Wage Structure 1999Who Gains from Trade Reform? Some Remaining Puzzles 1985A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination and Keynesian Unemployment 1986A Theory of Dual Labor Markets with Application to Industrial Policy, Discrimination, and Keynesian Unemployment 20011 Trade, Wages, and the Political Economy of Trade Protection: Evidence from the Colombian Trade Reforms*2004Trade, Technology and Productivity: A Study of Brazilian Manufacturers 1986-1998

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