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Acosta, Pablo; Montes-Rojas, Gabriel (2013)
Publisher: Universidad de Buenos Aires. Facultad de Ciencias Económicas. Instituto Interdisciplinario de Economía Política de Buenos Aires
Languages: English
Types: Article
Subjects: trade liberalization, formality, investment, Empresass, trade competitiveness, foreign competition, Comercio, labor markets, Política Económica, HB, HC, HG, informal labor
Rapid trade liberalisation can exert profound effects on labour markets. Domestic firms, to sustain competitiveness for survival, could react through cutting labour benefits to achieve cost reductions. Alternatively, trade liberalisation may alter the industry composition of firms changing the aggregate formality rates. This paper studies the relationship between trade liberalisation and informality in Argentina. Using manufacturing industry-level data for 1992-2003, the results confirm the hypothesis that trade increases informality in industries that experience sudden foreign competition. This explains about a third of the increase in informality. Sectors with higher investment ratios are able to neutralize and reverse this effect.