Dix-Carneiro and Kovak Trade Reform and Regional Dynamics affected regions, precisely the pattern of effects in Figure 4.

Seen through this lens, we can explain more detailed features of Figure 4, following Dix-Carneiro (2014) Section 7.4, which simulates a model of inter-industry reallocation with imperfect and slow adjustment of labor and capital. On impact, wages in more negatively affected markets decline, yielding a positive point estimate at the beginning of liberalization, in 1993. Some laborers reallocate relatively quickly, partly equalizing outcomes across markets and lowering the measured effects for a few years. Then, as specific factors begin reallocating away from more negatively affected markets, workers’ marginal products and wages decline in those markets. Continued specific factor reallocation amplifies those wage effects over the course of many years before leveling off after the incentive for specific factors to reallocate has been exhausted.

Figure 6 shows direct evidence of slow labor adjustment. Formal employment fell in regions facing more negative shocks relative to more positively affected regions. This adjustment occurred quickly in the years following liberalization and then stopped around 2004, consistent with initially rapid labor reallocation that tapered off by the mid 2000s. To measure regional capital adjustment in response to trade liberalization, we examine changes in the number and size of formal establishments in a given region. These measures are certain to be closely related to changes in regional stocks of capital and other factors complementary with labor.<sup>32</sup> Figure 10 Panel A shows liberalization’s effects on the number of formal establishments, demonstrating that regions facing larger tariff declines experienced larger contractions (smaller increases) in the number of local establishments. This reallocation occurred slowly, with an increase in the early 2000s and leveling out later in the sample period. Figure 10 Panel B shows that the decline in the number of establishments in harder hit locations is not offset by growth in the average size of each firm, which is generally unrelated to _RTCr_ . This result supports the use of changes in the local number of establishments as proxies for changes in local capital stocks.

We reinforce the idea that sluggish capital adjustment drove regional labor market dynamics by studying how cumulative log job creation and log job destruction rates reacted to regional tariff changes. We define job creation and job destruction as in Davis and Haltiwanger (1990), measuring job growth and contraction starting from 1991 until each year in 1992-2010. Figure 11 shows that markets facing larger tariff declines experienced an immediate and persistent decline in job creation rates relative to less affected local labor markets, suggesting a sharp relative decline in investment rates in more affected local labor markets. In contrast, job destruction rates were essentially unaffected through the late 1990s, after which they began to increase faster in relatively

> 32It is not possible to construct regional capital stocks in Brazil during our sample period. Manufacturing firmlevel capital stocks could in principle be constructed from the Annual Manufacturing Survey (PIA) in 1996 and later, but establishment-level investment is not collected, making it impossible to regionally allocate capital for multiestablishment firms. IBGE does not permit regional imputation in this case. Luis Carlos F. Pinto at IBGE, the official in charge of clearing the use of PIA, confirmed that capital stocks cannot be constructed at the regional level. Other data sources covering the remaining sectors of the Brazilian economy do not cover our sample period. The Agricultural Census is available only in 1996 and 2006, and the Annual Service Survey (PAS) only started in 2002.

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