Instituto de Economía

Abstract: This paper estimates the effect of local labor market conditions on crime in a developing country with very high crime rates. Contrary to the previous literature, which focuses on developed countries, we find that labor market conditions have strong effects on homicide rates. We exploit the 1990s trade liberalization in Brazil as a natural experiment generating exogenous shocks to local labor demand. Regions facing more negative shocks go through large relative increases in crime rates in the medium term, but these effects virtually vanish in the long term. This pattern mirrors the labor market responses to trade-induced shocks. Using the trade liberalization episode to design an instrumental variables strategy, we find that a 5% reduction in expected labor market earnings (employment rate x earnings) leads to an increase of 16% in local homicide rates. Our results highlight an additional dimension of adjustment costs following trade shocks that has so far been overlooked in the literature.