The Impact of Crisis-Related Changes in Trade Flows on Employment, Incomes, Regional and Sectoral Development in Brazil

This study uses the STAGE-LAB Computable General Equilibrium Model to analyze the potential impact of the trade shock associated with the Great Recession on labor and household income in Brazil. Our model assumes that high skilled labor is fully employed, while there is oversupply of labor in the market for medium skill and low skilled labor. Labor market adjustment for high skilled labor thus takes the form of wage adjustments. For low and medium skilled workers, instead, labor market adjustments lead to changes in employment levels. The Social Accounting Matrix used in our study allows us to distinguish seven regions within Brazil and we allow for the possibility that high skilled labor migrates across regions in response to wage changes.We consider the trade shock to be temporary and therefore assume that capital and land are fixed by activity. For our base case scenario we find a modest but appreciable GDP reduction of 2.1 per cent caused by reductions in trade flows during the crisis. Average returns to land and to capital increase during the period in some regions. All types of labor lose out in the crisis, with low and medium skilled labor losing more than high skilled labor