Trade and Employment in the Formal and Informal Sectors: A Natural Experiment from Cambodia

Abstract

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.