Protection, Openness, and Factor Adjustment: Evidence from the Manufacturing Sector in Uruguay

Using a panel of Uruguayan manufacturing firms we analyze the adjustment process in capital, blue collar, and white collar employment. Adjustment functions are defined with respect to the gap between optimal and actual factor use. Our results confirm the asymmetric nature of factor adjustment, the relevance of nonlinearities, and the interdependence between factor shortages. The average annual estimated desired to actual output gap due to adjustment costs for 1982–95 was 2%. A clear relationship emerges between trade openness and adjustment functions of all three factors. Sectors experiencing stronger trade liberalization adjust less when creating jobs (reducing labor shortages) than sectors with lower changes in tariffs. Also, the larger (in absolute terms) the tariff reductions, the easier it became to adjust when destroying jobs (reducing labor surpluses). Overall the association of higher international exposure with factor adjustment is stronger for blue collar workers than for white collar workers. The results for capital are qualitatively similar but quantitatively smaller.