Working Paper: CEPR ID: DP18195
Authors: Ana Margarida Fernandes; Joana Silva
Abstract: This paper estimates worker and firm impacts of foreign shocks, and the income support provided by assistance programs. It exploits quasi-experimental variation in firms’ foreign demand resulting from the global financial crisis, using employer-employee data for Brazil in 2004-2017, linked with firm customs and financial data, and administrative data covering the universe of cash transfer, unemployment insurance, and training beneficiaries. Negative employment effects take over a decade to dissipate fully, wage effects persist, and firm restructuring involves occupational adjustment, increasing permanently skilled workers while reducing unskilled workers. Brazilian workers suffer smaller employment losses in highly informal locations and concentrated sectors. Underlying labor scarring is firm scarring caused by selection (exit) and (revenue, employmentand productivity) downsizing. Unemployment insurance and cash transfers yield limited wage loss replacement (6 percent). Training does not increase. The evidence shows that a temporary shock induces persistent effects: firm restructuring scars incumbent workers and increases long-run inequality. Firm scarring may be even more severe in less flexible labor markets. Using data from Ecuador, analysis finds that firms do not adjust workforce composition, but theypermanently reduce capital which increases scarring.
Keywords: employment; wages; firms; exports; foreign shocks; global financial crisis
JEL Codes: F14; F16; J24; J46; L25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign shocks due to the GFC (F65) | Persistent declines in workers' employment in Brazil (F66) |
| Foreign shocks due to the GFC (F65) | Decrease in average months worked (J29) |
| Foreign shocks due to the GFC (F65) | Significant wage effects remaining (J31) |
| Labor market conditions (J29) | Adjustments workers and firms make in response to foreign shocks (F16) |
| Higher informality rates in localities (J46) | Smaller reductions in formal worker employment due to firm foreign shocks (F66) |
| Adjustment of incumbent firms (L11) | Employment and wage losses following foreign shocks (F66) |
| Income support programs (H53) | Limited replacement for lost earnings (J17) |
| Training programs (M53) | Do not significantly help mitigate the impacts of foreign shocks (F69) |
| Foreign shocks due to the GFC (F65) | Labor scarring primarily for low-skilled workers (F66) |
| Labor scarring for low-skilled workers (F66) | Exacerbating long-run inequality (F62) |