Trade Adjustment Costs in Developing Countries: - World Bank ...

Trade Reform, Employment Allocation and Worker Flows 129margin. This fact is consistent with the hypothesis that Brazilian firing costs,which proportionally increase with tenure, lead employers to shorten tenurethrough displacement. Workers in occupations of intermediate skill intensityexperience significantly fewer separations, and workers are significantly lesslikely to be hired into high-skill-intensive manufacturing occupations (with amonotonic drop in accession odds as an occupation’s skill intensity increases).Year effects are significant at the 1 per cent level and show both a strictlymonotonic increase in manufacturing separations and a strictly monotonic dropin manufacturing accessions.Worker heterogeneity is an important predictive component of separations andaccessions. A comparison between conditional and unconditional logit estimation(not reported here) shows that regressions are highly sensitive to the omission ofworker fixed effects. The relevance of conditional worker effects is consistentwith the hypothesis that the termination and formation of employer–employeematches is not random, even after controlling for a comprehensive set ofobservable worker and employer characteristics.The evidence so far shows that Brazil’s trade reform predicts salient changes toworker separations and accessions. But neither comparative advantage sectors norexporters exhibit the expected labor absorption; they separate from their workerssignificantly more frequently than other sectors and firms. Exporters also hiresignificantly less frequently. There are empirical concerns for these predictions ofworker flows such as the potential simultaneity of trade policies and exportingstatus, and the relevance of Brazil’s concomitant reforms. Those issues are addressedin Menezes-Filho and Muendler (2007) and refined subsequent research.7. EXPLANATIONS OF REALLOCATION FLOWSA strong candidate explanation for the reverse labor flows away fromcomparative-advantage sectors and away from exporters is endogenous changein productivity. Several case studies have documented for various countries in thecontext of trade liberalization episodes and other structural reforms that withinfirmproductivity rises in response to the removal of trade protection (for example,Levinsohn 1993; Hay 2001; Pavcnik 2003; Schor 2003; Eslava et al. 2004;Fernandes 2007; Muendler 2004). Exporters are more productive than nonexporters,as Table 7.3 has documented. If trade triggers faster productivitygrowth for exporters and in comparative-advantage industries because for thesefirms and industries larger market potential offers stronger incentives to improveefficiency, and if productivity increases faster than production, then labor willflow away from comparative-advantage sectors and away from exporters.Production, and market shares, increase less than proportionally with productivityif the elasticity of demand is less than unity in absolute value. As a result, outputshifts to more productive firms but labor does not. Menezes-Filho and Muendler(2007) offer detailed evidence on this adjustment process.