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Non-traded Gains From Trade - Selection in the Non-Traded Sector: Evidence from Brazil

Author

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  • Rafael Machado Parente
  • Rowan Shi

Abstract

We investigate how trade shocks affect the allocation of labor across plants at the local labor market level. Using Brazil’s import liberalization as a quasi-natural experiment, we uncover a new margin for the gains from trade: the reallocation of labor from smaller to larger producers in the non-traded sector. We find that in response to liberalization, larger non-traded producers self-select into importing, expanding as they gain access to inputs from abroad. We then develop a parsimonious model of heterogeneous producers incorporating this mechanism. The theory is consistent with the empirical findings and show that reallocation among non-traded producers is welfare-enhancing. In contrast, this reallocation effect disappears when all nontraded producers make the same importing decision.

Suggested Citation

  • Rafael Machado Parente & Rowan Shi, 2023. "Non-traded Gains From Trade - Selection in the Non-Traded Sector: Evidence from Brazil," IMF Working Papers 2023/265, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/265
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