Tariff Reduction and Employment in Canadian Manufacturing, 1988-1994

This paper uses firm-level data from the T2/LEAP to investigate whether the link between tariff changes and employment differed across firms with various productivity and leverage characteristics over the period 1988 to 1994. The results suggest that the combined effect of domestic and U.S. tariff reductions on employment was typically small, but that losses were significantly larger for firms which were less productive. For instance, firms with average productivity in 1988 responded to tariff changes by cutting employment by only 3.6% over the period 1988 to 1994, while lower productivity firms typically shed 15.1% of their workforce over the same period. This paper also indicates that firms which were more heavily in debt downsized more in response to declining domestic tariffs, suggesting that financial constrains became more binding when tariff cuts were implemented. These results suggest that firms with high productivity and low leverage were less likely than others to feel the impact of declining U.S. and domestic tariffs.