Regional Labor Market Effects of Trade Policy: Evidence from Brazilian Liberalization∗

This paper quantifies the effects of trade liberalization on local labor market outcomes and workers’ migration patterns. I extend the classic specific-factors model to examine the impact of national price changes on local labor markets. The model describes how tariff changes across industries affect wages in local labor markets within the liberalizing country. In particular, wages will fall in regions whose workers are concentrated in industries facing the largest tariff cuts, and workers will then migrate away from these regions in favor of areas facing smaller tariff cuts. This result provides a theoretical foundation for a prevalent empirical approach in previous studies of local labor markets and lends economic interpretations to estimates that allow the researcher to evaluate the magnitude of results along with their direction. I then use these theoretical results to measure how Brazil’s 1987-1995 trade liberalization affected wages and interstate migration within the country. I find that regions whose output faced a 10% larger liberalization-induced price decline experienced a 7% larger wage decline. In addition, liberalization resulted in a substantial shift in migration patterns. The most affected Brazilian states gained or lost approximately 2% of their populations as a result of liberalizationinduced shifts in migration patterns. These results demonstrate the empirical value of the specific-factors framework developed here and represent the first systematic evaluation of the effects of liberalization on internal migration.