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

Trade Reform, Employment Allocation and Worker Flows 131framework, which embeds heterogeneous firms in a classic trade model andderives predictions for labor turnover. Their setting preserves the prediction fromclassic trade theory that there is net job creation in comparative-advantageindustries and net job destruction in disadvantage industries. In the presence ofproductivity heterogeneity across firms, however, important differences betweengross and net job creation and destruction result. In disadvantage industries,where there is net job destruction, high-productivity firms expand to serve theexport market and create new jobs. In comparative-advantage industries, wherethere is net job creation, existing jobs are destroyed at low-productivity firms. 157.2 Potential implications for adjustment costsThe reported estimates owe their generality and robustness to a lean set ofidentifying assumptions. For the estimates in section 6, no structural assumptionwas needed other than that unobserved match-specific logistic shocks triggerseparations or accessions beyond the observed variables. For the precisemeasurement of labor market adjustment costs that are associated with tradereform, more explicit structural assumptions are required to model reallocationdelays and failures in general equilibrium.A chief concern of reallocation costs relates to potentially idle labor, andespecially to displaced workers who await formal-sector reallocation. Workersawaiting reallocation are not directly observable in formal-sector worker censuses.However, the Brazilian RAIS record changes at two margins that alter the pool ofprime-age male workers to be reallocated: separations from formal jobs fill thepool, and accessions into formal jobs empty the pool of workers to be reallocated.So two important measures for the potential idleness of labor are the rate of failedreallocations within a given time period, such as four years (48 months) followingdisplacement, and the average durations of successful reallocations within the giventime period. Numerous economic causes can be responsible for changes to the rateof failed reallocations and changes to the durations of successful reallocations.Menezes-Filho and Muendler (2007) document that the share of displaced workerswithout reallocation for four years increases from 18 percent to 22 percent between1989 and 1997 and does not subside again during the 1990s. There is somevariation in the failure rate across skill groups within any given year: young andcollege-educated workers’ reallocations fail less frequently than average. Timevariation, however, dwarfs the skill-group differences. A similar pattern applies todurations of successful reallocations, which increase from an average of 6.3 months(out of 48 months maximally) in 1989 to 9.5 months in 1997 and also neverlastingly drop back to a pre-1990s level. The relatively minor cross-sectionaldifferences between skill groups, compared to major time variation, suggests thatstudying macroeconomic sources of variation in labor-market performancepromises to uncover first-order changes in labor-market outcomes. Refinedestimates following Menezes-Filho and Muendler (2007), and tariff-predicted15 Formally, existing jobs are destroyed at low-productivity firms that exit. But a firm exit couldalso be interpreted as a plant closure within a firm, or as the shutdown of a product line within a plant.