Trade-induced Local Labor Market Shocks and Asymmetrical Labor Income Risk

• Authors: Ursula Mello.
• BSE Working Paper: 110703 | January 21
• Keywords: international trade , labor income risk , China shock , income process
• JEL codes: D31, E24, F14, F16, J31
• international trade
• labor income risk
• China shock
• income process

This paper investigates the relationship between international trade and asymmetrical labor income risk. Using the case study of Brazil, we inspect how an increase in import penetration following the China shock impacted the distribution of idiosyncratic earnings changes across the country’s local labor markets, depending on the initial sectoral composition of each region. We find that an increase in import penetration leads to a more disperse and negatively skewed distribution and that these effects can partially be explained by an increase in the volatility of hours worked following job and industry transitions. Moreover, the effect on dispersion grows larger as the lags between periods increase, suggesting a rise in the permanent risk. Through the lens of an incomplete market model, an unborn individual would be willing to forgo up to 4.4% of consumption to avoid the riskier labor market. The welfare cost is half if the higher-order risk is ignored.