# **I. Introduction**

Economic crises can harm workers through earnings losses, job displacement, and firm closures (Jacobson et al., 1993). Despite the temporary nature of most crises, their effects can be long-lasting due to several factors. Firms may engage in restructuring with lasting negative impacts on productivity and employment that they are unwilling to reverse due to sunk costs. If firms’ scarring occurs, worker scarring can occur even for workers who remain with the firm. Additionally, workers’ adjustment depends on their outside labor market options (including the prevalence of informality) and on assistance programs in case of job displacement. While a well-established literature documents the long-run effects on workers and firms of permanent shocks, such as trade liberalization or the China import competition shock (e.g., Goldberg & Pavcnik (2003); Autor et al. (2014); Utar (2018); Dix-Carneiro & Kovak (2019); Utar (2014); Dix-Carneiro et al. (2021)), little is know about the long-run effects of temporary shocks. Moreover evidence on the compensatory role of assistance programs is limited to the United States (e.g., Autor et al. (2013, 2014); Yagan (2019)).

In this paper we tackle a key unexplored question: what persistent effects on workers and firms are to be expected from temporary shocks in a developing country context marked by informality and limited assistance programs? To do so, we examine the dynamic medium to long-run impacts of temporary foreign shocks ensuing from the 2008–2009 Global Financial Crisis (GFC), on workers and firms and the cushioning effects of assistance programs. We use fifteen years of administrative employer-employee data from Brazil over the period 2004-2017 covering the universe of formal workers linked with longitudinal firm census and customs data. We also link for the first time the employer-employee data with the national registry of lowincome households, the worker registry of unemployment insurance and benefits disbursed, and beneficiary records of worker training from Brazil’s main training provider.

We exploit quasi-experimental variation in firms’ foreign demand resulting from the GFC – lower growth in destination markets’ GDP – to measure firms’ foreign shocks. To study the unequal distribution of effects across firms and pass-through to workers, our specifications examine how the evolution of incumbent worker or firm outcomes over the post-GFC period varies with the magnitude of the firm’s foreign shock, while controlling for observable worker and firm characteristics and fixed effects that capture time-varying domestic shocks at the sector and location levels.<sup>1</sup> Foreign shocks can affect economic outcomes differentially in the presence of informality and for highly concentrated sectors and state-owned firms (SOEs).<sup>2</sup> By leveraging spatial and

> 1For identification purposes, our analysis focuses on a relatively homogeneous universe of firms, those that export, but they exhibit important variation in the intensity of the GFC-related foreign shock they experience.

> 2See Dix-Carneiro et al. (2021) and Ulyssea & Ponczek (2022) on trade and informality and Brugu ́es et al. (2022) and Colonnelli et al. (2020) on how political connections of state-owned firms foster patronage and

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