# **4. The Broken Relationship between Imports and Labor Markets: A Bartik Analysis**

# • **Overview of the Bartik Approach**

Canonical trade models predict that increased trade increases factor income and alters the wage bill. However, recent empirical evidence suggests that labor markets are not as flexible as most models assume them to be, implying that adjustment to changes in trade volumes can be very slow (Autor, Dorn & Hanson, 2013; Dix-Carneiro & Kovak, 2014). Furthermore, since the effects of trade are typically heterogeneous across sectors, individuals and regions are differentially exposed to sector-specific shocks, giving rise to distributional concerns.

In the previous section we analyzed how trade agreements impact trade flows from Egypt to the rest of the world. Liberalization policies do seem to have a positive effect on exports but negligible on imports. Yet, labor market outcomes have worsened. To estimate the relationship between labor markets and trade, we follow a common methodological framework to specific local conditions and employ a geography-based Bartik (1991) approach to quantify exogenous export demand shocks from the US and EU countries for Egyptian imports.

Bartik models exploit the spatial variation in sectoral-composition assuming that changes in sector-specific foreign demand is different across regions. In other words, regions more exposed to trade for a particular sector and with major employment for the same sector will be more affected from a trade shock particular to the sector. Differences in trade exposure of regions to this shock serves as an identification tool. For the trade exposure to be regionally identifiable, some barriers or rigidities in the labor market should exist. Sluggish or segmented regional labor markets are a fundamental principal of the approach (Raymond et al, 2020).

Figures 8 and 9 provide evidence of the concentrated trade exposure and segmented labor markets. Using the Enterprise Census (EC) from 2017 and the Labor Force Survey (LFS) from the same year, we show in Figure 8 that regions with a higher number of exporting firms (Panel A) are also the regions with major employment concentration (Panel B). Although the EC does not allow us to track importing firms, exporting firms heavily rely on imported raw materials and inputs for domestic production and exports. Around 75% of imported goods are raw materials, intermediate goods, and fuel necessary for both production and exports. Thus, we argue it is a good proxy for importing firms (Zaki et al., 2018).

Similarly, in Figure 9, we observe that informality rates, mean real wages, and female labor force participation are highly distinct between regions at the beginning and end of our study period (2009-2017). In fact, although all indicators have increased, most of the regional differences persist after eight years. For example, the four regions with the highest informality rates, FLFP, and mean wages in 2009 remain the top four in 2017. The same pattern is maintained for the four regions with the lowest labor market indicators. Barriers to labor mobility seem to be stringent. The structure of occupations in Egypt could be a potential explanation since it is skewed 10