Working Paper: CEPR ID: DP3874
Authors: Pinelopi Koujianou Goldberg; Nina Pavcnik
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 labour 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 labour market reform that increased the flexibility of the Colombian labour market. These results point to the significance of labour market institutions in assessing the effects of trade policy on the labour market.
Keywords: Brazil; Colombia; Informal Sector; Labour Market Regulation; Trade Policy
JEL Codes: F10; F13; J31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | informal employment (J46) |
| tariff cuts (F13) | informal employment (J46) |
| labor market reform (J48) | informal employment (J46) |
| trade policy (F13) | informal employment (J46) |
| labor market institutions (J08) | informal employment (J46) |