Trade and employment in the formal and informal sectors : a natural experiment from Cambodia

To assess how trade affects employment in the formal and informal sectors, we exploit a natural experiment from Cambodia; the EU’s reform in rules of origin for duty-free market access provided a positive export shock to the garment industry and a negative import shock to the textile industry. We use a unique dataset on both formally registered and unregistered establishments in Cambodia. We find that the trade shocks caused large positive employment effects on formal garment establishments and large negative employment effects on formal textile establishments, with little employment effects on informal establishments in these industries. The positive employment effects predominantly involve female workers in locally owned incumbent firms. The Institute of Developing Economies (IDE) is a semigovernmental, nonpartisan, nonprofit research institute, founded in 1958. The Institute merged with the Japan External Trade Organization (JETRO) on July 1, 1998. The Institute conducts basic and comprehensive studies on economic and related affairs in all developing countries and regions, including Asia, the Middle East, Africa, Latin America, Oceania, and Eastern Europe. The views expressed in this publication are those of the author(s). Publication does not imply endorsement by the Institute of Developing Economies of any of the views expressed within. INSTITUTE OF DEVELOPING ECONOMIES (IDE), JETRO 3-2-2, WAKABA, MIHAMA-KU, CHIBA-SHI CHIBA 261-8545, JAPAN ©2020 by author(s) No part of this publication may be reproduced without the prior permission of the author(s). 3 Trade and Employment in the Formal and Informal Sectors: A Natural Experiment from Cambodia†