Do trade agreements contribute to the decline in labor share? Evidence from Latin American countries

Abstract

In this paper, we explore the role of trade in the evolution of labor share in Latin American countries (LAC). We use trade agreements with large economies (US, EU, and China) to capture the effect of sharp changes in trade. During the last two decades, the countries that signed these trade agreements experienced a negative trend in labor share, while in the remaining countries there is an average increase in this share, generating a gap of 7 percentage points. We apply synthetic control methods, combined with regression analysis, to estimate the average causal impact of trade agreements on labor share. While effects are heterogeneous in our eight case studies, the average impact is negative between 2 to 4 percentage points of GDP four years after the entry into force of the trade agreements. This result is robust to the specification used and to the set of countries in the donor pool. We find that trade agreements with more labor-abundant counterparts affect labor share more, in line with traditional Heckscher–Ohlin forces. We also find that, after trade agreements, exports of manufactured goods and the share of industry to GDP increase on average, most notably in the case studies where negative effects on labor share are significant, a fact compatible with enhanced participation in Global Value Chains. Finally, a decomposition shows that all the reduction in labor share is explained by a negative impact on real wages.