Turnover costs and transition in the Brazilian labor market.

Abstract

The three papers in this dissertation examine the consequences of turnover costs in the Brazilian labor market during a period of massive adjustment. The first paper examines the impact of labor regulation on flows through the labor market by comparing hiring and separations over the business cycle in formal and informal labor markets in Brazil. Using a simple model with turnover costs in employment relationships, the paper shows that the macroeconomic consequences of employment protection can be described by an inverse relationship between changes in the incidence and duration of employment. Employment protection moves labor markets along this curve, and the formal and informal labor markets turn out to lie at opposite ends of it. The second paper investigates whether restrictive employment protection laws have impeded transition to market reforms in Brazil, and finds that they did not. Using panel data methods on a large sample of prime-age Brazilian males, the paper shows that the relationship between formal and informal wages is cyclical. There is no evidence of divergence over the longer term. I interpret these facts in light of a model in which short-run contracting inefficiencies can thwart efficient factor allocation in the medium run. The third paper estimates the consequences of the decline of the Brazilian manufacturing sector for displaced workers. I estimate that earnings decline by nearly 50% after displacement relative to one year prior, about a quarter of which is attributable to reduced hours of work rather than lower wages. However, hours recover fully within one year of displacement, while wages remain about a third lower. Surprisingly, the displacement effect is a U-shaped function of age, despite the fact that job tenure rises steadily with age. These findings run contrary to the predictions of most theories of job loss. I show that a simple model in which the ratio of specific to general human capital reaches a peak at middle age may account for the facts.