How do minimum wages affect earnings inequality in countries with large informal sectors? I provide reduced-form evidence that the 2000s minimum wage hike in Brazil raised overall inequality by increasing inequality inside the informal sector. I develop a model where heterogeneous firms select into informality to investigate when and how raising the minimum wage can increase inequality. I calibrate the model to Brazil and find that, by generating substantial informality, the increase in the minimum wage raised overall inequality by 6.4%. These results suggest that movements into and out of the informal sector modulate the effects of formal labor legislation.

We study social security reforms in economies characterized by segmented labor markets and pension systems. We develop a general equilibrium life-cycle model with heterogeneous agents, endogenous retirement, and sectoral choice. In the model, individuals choose to work in the public sector, the private formal sector, or the informal sector, taking into consideration differences in compensation structures, pension eligibility rules, and benefit formulas across sectors. The model is calibrated to Brazil, a country characterized by high informality, generous public pensions, and rapid demographic transition. We evaluate reforms such as unifying pension systems and increasing the minimum retirement age. These policies reduce the projected social security deficit by nearly 40%, increase output, stimulate capital accumulation, and generate average welfare gains, despite redistributive effects across age groups, sectors, and along the transition path. Sectoral reallocation, particularly the shift out of public employment and into informal work, plays a key role in shaping the reforms’ impact. Ignoring these margins can lead to a significant underestimation of the fiscal and macroeconomic effects of pension reforms.

Despite progress in reducing policy-induced trade barriers, Latin America’s trade openness has barely increased. We use disaggregated trade data to find considerable empirical evidence of under-trading, albeit with substantial heterogeneity across sub-regions and products. Poor transport infrastructure and customs inefficiencies are key factors explaining under-trading in manufacturing in most sub-regions in Latin America and the Caribbean (LAC), while other constraints, such as the quality of factors of production or governance, appear to affect specific countries in the region. Leveraging recent advances in the structural gravity literature, we estimate trade elasticities at different horizons and show how long-run elasticities in LAC significantly diverge from peers, in part due to the region’s relatively poor infrastructure. Counterfactual policy experiments suggest that closing half of the infrastructure gap between LAC and advanced economies could lift exports by up to 30 percent and yield significant GDP gains.

We empirically assess the relationship between industrial policies (IPs) and firm performance, showing it varies by instrument, firm and industry characteristics, value chain position, and time horizon. Consistent with the trade literature, IPs reducing trade barriers are linked to medium-term improvements in firm performance. Subsidies discriminating against foreign interests are linked to short-term improvements in value added (VA), productivity and payroll, which fade or turn negative in the medium-term. Export incentives are linked to weaker performance in the short-term followed by medium-term gains. These relationships are stronger for young and financially constrained firms. Industry distortions also matter—IPs are linked to stronger improvements in VA, capital and payroll when distortions are high. Finally, we find cross-sectoral spillovers: protective IPs targeting upstream sectors are associated with improved outcomes in downstream firms, while those targeting downstream sectors correlate with weaker upstream performance.

Industrial policies (IPs) are on the rise. The most common motive for pursuing IPs is to boost strategic competitiveness of the targeted products. Leveraging a novel database of industrial policies and using the local projection difference-in-differences approach, this paper examines the dynamic relationship between IPs and trade competitiveness. Our results point to a nuanced picture. On average, products targeted by IPs experience a larger  increase in competitiveness than non-targeted ones. However, there is substantial heterogeneity across different types of product and policy instruments. The average effect is driven by initially competitive products. Turning to policy instruments, domestic subsidies are associated with short-term improvements in trade competitiveness, whereas export incentives are linked to medium-term improvements in competitiveness. Finally, we focus on three widely discussed value chains-solar photo-voltaic, wind turbines, and electric vehicles-and present suggestive evidence that IPs can have spillover effects on non-targeted products through value chain linkages. Our findings for these three value chains suggest that IPs targeting upstream products are associated with larger improvements in the RCA of products using these upstream products relative to IPs targeting products at the same value chain stage.

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.