The China Shock and Employment in Portuguese Firms

This paper considers the effects of Chinese import competition on firm-level labor market outcomes in Portugal. We examine direct competition in the Portuguese market and indirect competition Portugal's largest export markets in Western Europe. 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 firm product mix and distribution of sales across countries. 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 in Portugal. Our findings also suggest a centrally important role for Portugal's stringent labor market regulations in limiting firms' ability to adjust to competitive shocks. In our earlier sample period (1995-2000), firms have limited ability to adjust employment, hours, or wages, and the primary adjustment margin is firm exit. In the later period (2000-2007), when more flexible temporary contracts comprise a larger share of employment, we find employment reductions among more exposed firms. Those employment reductions are entirely accounted for by changes in temporary employment, with no effect on permanent employment. We expect these findings to be informative for other peripheral European countries that had specialized in labor-intensive manufacturing industries operating under inflexible labor market regimes.