Regional labor market differences in Brazil and search frictions: Some structural estimates

Abstract

We estimate an equilibrium job search model for six metropolitan areas located in different regions of Brazil. Two mechanisms of wage determination are considered: wage posting by monopsony firms and Nash bilateral bargaining. In order to estimate the model, we use the non-parametric method developed by Bontemps, Robin, & van den Berg [2000. Equilibrium search with continuous productivity dispersion: Theory and nonparametric estimation. International Economic Review, 41(2), 305-358]. There is significant heterogeneity among the estimated structural parameters for these regions. We succeed in rationalizing some well-known regional differences in wages, unemployment rates and productivity prevalent in Brazilian labor markets, thus offering new interpretations. Metropolitan regions in the Northeast have much lower λ0 (arrival rate of wage offers for unemployed workers) and λ1 (arrival rate of wage offers for employed workers) vis a vis areas in the South or Southeast regions. This is a new, and much more precise, result worth considering on the regional inequality debate in Brazil. Regional inequality in wages, besides being an outcome of its regional human capital distribution, can be rationalized as inequality of search frictions brought by differences in λ1 . We found a key (indirect) role for search frictions when analysing productivity differences as well. Since search frictions impact simultaneously on monopsony power as well as on productivity, in order to understand better regional productivity differences we must deepen our analysis on how these structural parameters are differentiated by regions. Labor market frictions add important insights into the regional debate, something not captured by more traditional econometric reduced form approaches.