Trade liberalization and local labor market adjustment in South Africa

Despite a large literature analyzing trade liberalization in developing countries, little evidence exists around its effects in sub-Saharan African economies characterized by high levels of baseline unemployment and weak manufacturing sectors. Using a local labor market approach, we investigate the causal effects of tariff reforms implemented in South Africa between 1994 and 2004 on labor market outcomes at the individual level. More specifically, we construct a district-level measure of exposure to tariff reductions equal to a weighted average of industry tariffs using baseline industry shares as weights, and estimate the effect of this shock on local economies. We find that workers in districts facing larger tariff reductions experience a significant decline in both formal and informal employment in the tradable sector, driven primarily by a decline in manufacturing employment, relative to workers in districts less exposed to these reductions. There is no evidence of any significant effect on wages for those who remain employed. However, displaced workers do not show any evidence of transitions into other sectors, or migration to less affected regions; rather, they are more likely to become discouraged workers or exit the labor force entirely, and show an increased probability of accessing government transfers.