The China shock and employment in Portuguese firms

China’s rise as an export powerhouse has impacted labor markets across the Western world – but the effects appear to differ dramatically across countries.  We evaluate the impact of rising Chinese exports on employment in Portuguese manufacturing industries by looking at both direct competition in the Portuguese market and indirect competition in Portugal’s largest export markets in Western Europe (Germany, Spain, Italy, France , and the UK).  In addition, we explore how Portugal’s stringent labor market regulations might have shaped those responses.

Using rich employer-employee data matched to firm-level trade transactions, we measure the degree to which different Portuguese firms faced Chinese import competition, based on firms’ distribution of sales across products and export destination markets. We find economically and statistically significant employment declines in firms with more exposure to Chinese competition in European export markets, but minimal effects of direct competition with Chinese goods in Portugal itself.

Our findings also suggest a centrally important role for Portugal’s stringent labor market regulations in constraining firms’ capacity to adjust to these shocks.  In the late 1990s, firms had limited ability to adjust employment, hours, or wages, and the primary adjustment margin was firm exit. Between 2000 and 2007, more flexible temporary contracts comprised a larger share of employment, and we find significant employment reductions among more exposed firms, allowing these firms to avoid exiting the market. Consistent with our interpretation, those employment reductions are entirely accounted for by changes in temporary employment, with no effect on permanent employment.

Our results are likely to shed light on the way in which the China shock impacted other peripheral European countries specialized in labor-intensive manufacturing industries and operating under stringent labor market regulations.  There, too, the burden of adjustment is likely to have fallen disproportionately on workers in temporary contracts.

Click here to go to the paper by Lee G. Branstetter, Brian K. Kovak, Jacqueline Mauro, and Ana Venâncio.