value from alternative job options within the current labor market and the option value from having alternative job options in other markets.

Our model shows that the change in relative welfare of workers across labor markets is a function of only the probability of moving and the labor supply elasticity. This is a powerful result that greatly simplifies the analysis of the welfare impacts of trade shocks. The relative welfare result does not depend on the underlying moving cost structure, observed changes in future wages, or moving probabilities across jobs within a labor market.

We then structurally estimate the model using the employer-employee panel data from Brazil. In the first stage of the estimation, we pin down the common value attached to each labor market and the moving cost between labor markets using a gravity-like equation. The implied probability of moving between labor markets is then calculated with the estimated value of each market and the estimated moving cost. In the second stage, we pin down the labor supply elasticity of our model. We derive an estimable equation describing the relationship between a change in the transformed value of the labor market and a change in wages, with the labor supply elasticity governing the responsiveness of the former to the latter. We exploit variation in residual wages induced by the same instrument we used earlier for motivating evidence: the exogenous change in import demand directed to the labor market. By plugging in these estimates into the relative welfare result previously mentioned, we find that, during the sample period, a 10% rise in exports increases the lifetime welfare of a median formal sector worker by 2.99% of her annual wage.

Finally, we turn to the full general equilibrium simulation of our model to quantify the effect of a trade shock on workers’ welfare and various labor market outcomes. Our benchmark trade shock is a 20% permanent decline of trade costs in the manufacturing sector from Brazil to each of its trading partners. This positive export shock to the Brazilian manufacturing sector reallocates labor from the agriculture sector toward the manufacturing and service sectors. On average, the lifetime welfare of workers increases due to this shock, with the amount of increase equivalent to a 32.45% one-time and temporary increase of the annual wage. Workers in the manufacturing sector experience 15.13% larger welfare increases than workers in the agriculture sector.

We highlight the importance of our job options channel by comparing our benchmark model to an alternative specification without this channel. We show that the benchmark model generates a larger labor reallocation between labor markets compared to the alternative model, primarily by increasing the likelihood that workers find a better job in response to a positive shock. In addition, our channel is able to capture trade-induced within-market mobility, which does not exist in the alternative specification. As a result, the welfare effect from the alternative model is 67.7% smaller than in our benchmark model with the job options channel.

Lastly, we explore the role of labor mobility frictions in welfare gains from trade by quantifying the effect of policies mitigating the degree of mobility frictions faced by workers. This is an important 3