Trade and Employment From Myths to Facts - International Labour ...

Trade and Employment: From Myths to Facts
… while, under some circumstances, trade liberalization can reduce informality
When examining how trade liberalization affects informality in Mexico, Aleman-
Castilla (2006), broadly following the Goldberg-Pavcnik (2003) methodology, finds
that industries that were more exposed to trade saw higher increases in the rate of
formality. The author argues that the impact on product prices was minor, while the
reduction in import prices raised the productivity of the tradables sector and, hence,
expanded the demand for formal labour overall. The results are based on data for
the period 1988–2002 and the study focuses on trade liberalization under NAFTA.
Aleman-Castilla models the decision process of firms facing the option of producing
either in the formal or the informal sector. Secondly, the author incorporates a framework
that explains how trade liberalization affects the performance of firms. And
thirdly, these two points have been put together. The author uses a dynamic industry
model with firm heterogeneity similar to that used by Melitz (2003) to describe the
way in which trade liberalization could affect the rate of informality. The original
model shows how exposure to trade induces only the more productive firms to export
while simultaneously forcing the least productive firms to exit. Both the exit of the
least productive firms and the additional export sales gained by the more productive
firms reallocate market shares towards the more productive firms and contribute to
an aggregate productivity increase. Profits are also reallocated towards more productive
firms.
Box 4-3: Individual characteristics of informal workers
Apart from providing estimates of industry informality differentials, the first stage estimation
of Aleman-Castilla (2006) is also useful to study the determinants of informal
labour at the individual level. As expected from the human capital theory, the probability
of being informal decreases with years of experience and schooling. It is also
lower for married workers, but not for those cohabitating with a partner without being
married. Males seem to be more likely to be informal than females. This result does
not seem to support what Roberts (1989) finds for the labour market of Guadalajara,
Mexico, but is consistent with Goldberg and Pavcnik’s (2003) findings for Colombia.
Within a household, the likelihood of informality is significantly lower for the first
provider of income and significantly higher for the second provider, which supports
the results of Roberts (1989) and Maloney (1999). The findings are reasonable considering
that, as found by Roberts and argued by Maloney, the deductions made for
social welfare in formal employment are perceived as a disadvantage by many workers.
Since social welfare in Mexico normally covers not only the worker but his family as
well, there is no benefit for the second provider of income to work in the formal
sector and pay the welfare deductions to get his or her own social insurance.
The findings from Aleman-Castilla (2006) reveal interesting results regarding
the geographic characteristics of informality. The probability of informality varies significantly
across cities. The probability of informality appears to be positively
correlated with the population of the city where the worker lives, 5 and also with the
5 More precisely, the natural logarithm of the population.
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