Dix-Carneiro and Kovak Trade Reform and Regional Dynamics inter-regional mobility, but it also implies that local labor demand in more adversely affected regions keeps falling relative to the rest of the country for years following the end of the liberalization. We provide a simple explanation for the slow growth of the regional effects based on geographical mobility frictions for both labor and other complementary factors of production such as capital, with these frictions mutually reinforcing each other to drive slow adjustment (Dix-Carneiro 2014). Agglomeration economies as in Kline and Moretti (2014) are similar in spirit and consistent with the observed patterns of adjustment, as both mechanisms generate dynamics in local labor demand that persist for long periods of time following a one-time shock. We focus our theoretical interpretation on sluggish factor adjustment because additional evidence on the regional number of establishments, establishment entry and exit rates, and job creation and destruction rates is supportive of the sluggish factor adjustment hypothesis. Furthermore, while both explanations can generate the qualitative patterns we observe, these patterns are quantitatively consistent with the slow adjustment analysis in Dix-Carneiro (2014).

The longitudinal nature of our data allows us to track individual workers over time, observing outcomes for two otherwise identical workers who just before liberalization lived in regions that would subsequently face different local trade shocks. Menezes-Filho and Muendler (2011) pioneered the use of administrative panel data to study trade-induced labor reallocation.<sup>1</sup> Our paper is unique in focusing on the _dynamics_ of labor market effects of liberalization, documenting how these effects vary over the medium- to long-run. We find that workers whose initial region faced a larger tariff decline become less and less likely to be formally employed over time, and lose substantial amounts of formal earnings in the years following liberalization. We also observe worker adjustment in the face of negative labor demand shocks. Formal tradable sector workers facing more negative local shocks are more likely to transition into formal nontradable sector employment, but on average cannot offset lost tradable sector employment or earnings.<sup>2</sup> Using supplementary data from the Decennial Census, we find that regions facing larger tariff declines experience relative increases in informal employment. Informal sector jobs do not provide legally mandated labor protections or other benefits, and often involve lower compensation, fewer opportunities for training and advancement, and generally less favorable working conditions (Goldberg and Pavcnik 2007, Bacchetta, Ernst and Bustamante 2009). In harder-hit regions, non-employment also strongly increases in the medium run, but in the longer run non-employed individuals eventually find employment in the informal sector. These results seem to contradict prior work, which typically finds minimal effects of trade on informality in Brazil (Goldberg and Pavcnik 2003, Menezes-Filho and Muendler 2011, Bosch, Go ̃ni-Pacchioni and Maloney 2012). However, our results can be reconciled based on differences in sectoral coverage, short-run vs. mediumand long-run transitions, and different data structures. In contrast to the prior work on Brazil,

> 1See Krishna, Poole and Senses (2014) for another more recent example.

> 2Menezes-Filho and Muendler (2011) also find evidence for transitions into non-manufacturing employment using industry variation in tariff cuts and using short panels from the _Pesquisa Mensal de Emprego_ (PME).

3