Local Labor Market Effects of Trade Policy: Evidence from Brazilian Liberalization

This paper measures the effects of Brazil’s 1987-1995 trade liberalization on local labor market wages and internal migration patterns. I develop a specific-factors model of regional economies to examine the impact of national price changes on local labor markets. In the model, a region’s industry mix determines the local impact of liberalization, with larger wage declines in regions where workers are concentrated in industries facing the largest tariff cuts.

I find that regions whose output faced a 10% larger liberalization-induced price decline experienced a 9.4% larger wage decline. In addition, liberalization resulted in a shift in migration patterns. The most affected Brazilian states gained or lost approximately 0.5% of their populations as a result of liberalization-induced shifts in migration patterns. These results demonstrate the importance of considering the local effects of national trade liberalization and represent the first systematic evaluation of the effects of liberalization on internal migration.