labor with capital or unskilled workers with more productive skilled workers. Estimating effects on hours worked and wages, we uncover another mechanism for firms to adjust: they reduce hours worked and lower wages of their incumbent workers or of new workers. This mechanism implies that firms freeze their employment and it may be chosen to preserve valuable worker-firm links or by necessity in economies where worker displacement is costly and regulatorily difficult. In practice, these mechanisms can co-exist, and there is limited empirical evidence on their relative importance and implications to inform the policy debate. Our estimates suggest more frequent non-renewal of fixed-term contracts and a persistent reduction in hours worked for incumbent workers in Brazil in response to adverse foreign shocks. Other mechanisms relate to within-firm restructuring that takes the form of occupational adjustment in response to adverse foreign shocks, permanently replacing unskilled with skilled workers.

Fourth, underlying labor scarring our evidence shows firm scarring caused by selection (exit) and downsizing in firm revenues, employment, and productivity. While firm exit occurs just in the first year, negative effects on revenues and labor and total factor productivity are persistent. Firms reduce employment of both skilled and unskilled workers but adjust their occupational structure towards skilled workers. Firms’ use of materials declines. Firm exit is higher among less productive firms.

Fifth, we show that income support programs mitigate the impacts of foreign shocks on workers’ incomes but only to a limited extent. An adverse firm foreign shock leads to an increase in its workers’ access to unemployment insurance and to payments from the Bolsa familia cash transfer program in Brazil. These programs replace 6 percent of lost earnings: 4.3 percent from unemployment insurance and 1.7 percent from Bolsa Familia. The income replacement of unemployment insurance is similar to that found by Yagan (2019) for the United States (US), while that of Bolsa Familia is lower than that of welfare programs in the US found by Autor et al. (2013, 2014).<sup>3</sup> Our estimates suggest that training programs do not help to mitigate the impacts of foreign shocks on workers.

The types of adjustment that we estimate require a certain degree of labor market flexibility. Using data from Ecuador (a less flexible labor market), we find qualitatively similar effects: persistent reductions in worker employment occurring only for the lower-skilled as a result of GFC-related foreign shocks to Ecuadorian firms. However, negative effects on worker average months worked are smaller in magnitude than those in Brazil and effects on wages

> 3Autor et al. (2013, 2014) show that welfare programs compensate for 10 percent of earnings losses in the US in response to the China competition shock, with increases in the uptake of social security disability insurance being substantially larger than the uptake of unemployment insurance and trade adjustment assistance. Trade adjustment assistance differs from unemployment insurance and cash transfers in that its main benefit is the coverage of training costs for workers whose jobs are displaced by import competition or offshoring. Hyman (2018) shows a substantial positive impact of trade adjustment assistance on worker earnings in the US.

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