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Distributional Effect of International Trade and Comparative Advantage in Labor Markets∗

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Distributional Effect of International Trade and Comparative Advantage in Labor Markets∗ Distributional Effect of International Trade and Comparative Advantage in Labor Markets∗ Rodrigo Adão MIT September 20, 2015 Abstract This paper investigates the distributional consequences of international trade shocks in the con- text of the Brazilian labor market. First, I document a new set of facts about how differential ex- posure to commodity price shocks across educational groups and regions leads to differential out- comes in terms of sectoral employment and wages. Second, I show that such facts are qualitatively consistent with a two-sector Roy model where worker heterogeneity regarding comparative and ab- solute advantage in sector-specific tasks determines the structure of employment and wages. Third, I establish that the schedules of comparative and absolute advantage are nonparametrically iden- tified from cross-regional variation in sectoral responses of employment and wages induced by sector demand shocks. Lastly, I build on this result to structurally estimate the model in the sample of Brazilian local labor markets. My structural estimates indicate that a 10% decrease in commod- ity prices causes counterfactual increases of 1.2% in the skill wage premium and of 5% in wage dispersion. ∗Author contact information: [email protected]. I am extremely grateful to Daron Acemoglu, Arnaud Costinot and Dave Donaldson for invaluable guidance and support. I also thank Pol Antras, David Autor, Arthur Braganca, Ariel Burstein, Dejanir Silva as well as seminar participant at the MIT Labor Lunch and the MIT Macro-International Lunch. All errors are my own. 1 1 Introduction In an integrated world economy, shocks in a particular country have the potential to exert different effects across different workers within another country located on the other side of the globe. For example, if China implements a large-scale plan of infra-structure expansion, what is the effect on workers employed in the mining industry relative to those in the auto industry within the U.S.? Alter- natively, if Saudi Arabia aggressively reduces oil production, what is the effect on workers residing in oil-rich regions relative to those in oil-poor regions within Brazil? More generally, if such shocks affect the relative world price of various products, which workers stand to gain or lose within a country? And how large are these distributional effects? Such distributional concerns would not be relevant if homogeneous workers were able to perfectly switch their sector of employment, their region of residence, and their level of skill. However, this is unlikely to be true. Consider how the negative shock to the world oil supply caused by Saudi Arabia’s policy affects different workers in Brazil. In order to expand production in response to higher oil prices, firms compete for the residents of oil-rich coastal regions with the necessary skills to perform the daily tasks in the offshore drilling industry, pushing their wages upwards. In contrast, workers without these skills and those unable to move to the oil-rich areas are not directly affected by the higher labor demand in the Brazilian oil industry. This simple example suggests that heterogeneous workers are differentially exposed to international trade shocks due to their limited ability to respond to changes in sectoral labor demand. In this article, I propose a unified empirical and theoretical framework to investigate how differential exposure to sectoral shocks across educational groups and regional markets leads to differential outcomes in terms of employment and wages in the context of the Brazilian labor market. The first contribution of the paper is to provide a new set of empirical facts that connect changes in the international price of agriculture and mining commodities to changes in the Brazilian structure of wages and employment between 1980 and 2010.1 First, I establish that aggregate movements in Brazilian wage dispersion are negatively related to the evolution of international commodity prices with the correlation being mainly driven by changes in wage differentials associated with workers’ level of education, sector of employment and region of residence. Second, I explore the variation in the importance of different commodity-oriented industries in employment across educational groups and regional markets to establish a causal relation between commodity prices and labor market out- comes. In each region, I measure exposure to international commodity price shocks for two worker groups: High-School Graduates (HSG) and High-School Dropouts (HSD). The exposure of a group- region pair is defined as the interaction between the change in commodities’ world prices and the initial participation of corresponding commodities in the group’s labor payroll in the region. Armed with this measure, I document that regional economies more exposed to positive price shocks expe- rienced stronger employment expansions in the commodity sector among both HSG and HSD. This employment expansion is associated with mixed responses in the commodity sector wage differen- tial: it increases for HSG, but remains stable for HSD. Lastly, higher exposure to positive shocks is 1Production of basic products constitutes an important part of the Brazilian economy. In 2010, agriculture and mining industries represented 58.5% of total exports and 19.9% of total employment. 2 related to stronger growth in the group’s average wage which, in turn, translates into a reduction in the HSG-HSD wage premium because of the relatively higher employment share in the commodity sector among Brazilian HSD. In order to explain this rich response pattern in labor market outcomes across groups and regions, I propose a Two-Sector Roy Economy as in Heckman and Honore(1990). Within each group and re- gion, individuals are heterogeneous with respect to a skill bundle that, ultimately, determines their efficiency in the sector-specific tasks demanded by the commodity and the non-commodity sectors. Conditional on the price of these sector-specific tasks, the heterogeneity in sector efficiency translates into heterogeneity in potential sector wages, generating endogenous selection of an individual to the sector yielding her the highest labor income. To be more precise, the sector employment decision is intrinsically related to the worker’s comparative advantage defined as the worker’s efficiency in the commodity sector task relative to her efficiency in the non-commodity sector task. Whenever the worker’s comparative advantage is higher than the relative task price offered in the non-commodity sector, the worker decides to be employed in the commodity sector. Alternatively, the worker’s wage, given her employment decision, depends also on the worker’s absolute advantage defined as her effi- ciency in the task specific to the non-commodity sector. In this environment, an individual’s exposure to sectoral demand shocks is centrally dependent on her level of comparative advantage. To see this, consider a partial equilibrium comparative statics ex- ercise in which a demand shock increases the task price in the commodity sector while not affecting the task price in the non-commodity sector. The shock increases the wage of all commodity sector employ- ees, but it only affects the wage of those non-commodity sector employees that decide to switch into the commodity sector. These sector-switchers are the non-commodity sector employees whose level of comparative advantage is similar to the pre-shock ratio of sector-specific task price. Accordingly, the magnitude of the change in sector employment is determined by the amount of such workers in the economy as controlled by the comparative advantage distribution. To the extent that sector-switchers are distinct from sector-stayers in terms of sector-specific efficiency, the change in employment compo- sition affects the average efficiency in the sector with the potential to attenuate or reinforce the direct effect of the task price change. The magnitude of this compositional effect is directly related to the difference between the average absolute advantage of sector-switchers and sector-stayers. In a group and region, the average wage response combines the gains of workers employed in the two sectors, depending on both the sector employment composition and the comparative advantage distribution. In line with this discussion, I show that two functions are sufficient to evaluate the impact of sec- toral shocks on the average and variance of the log-wage distribution in a group and region. Specif- ically, (i) the distribution of comparative advantage; and (ii) the average absolute advantage condi- tional on the level of comparative advantage. The second contribution of this paper is to provide a novel result that establishes the nonparametric identification of such functions using cross-regional variation in sector labor demand. For each worker group, I assume that regions are segmented labor markets with parallel schedules of comparative and absolute advantage; yet, I allow regions to have different skill shifters to accommodate regional variation in the level of sector-specific task supply. Under this assumption, the schedules of comparative and absolute advantage are nonparametrically identified, respectively, from responses of sector employment and average sector wage to changes in 3 sector-specific task prices induced by exogenous shocks to sector labor demand in the cross-section of regions. The identification result is valid for an arbitrary number of observable worker groups and it imposes no parametric restrictions on the
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