The Effect of Foreign Competition on Family Labour Allocation

Over half of the workers in the developing countries are either self-employed or unpaid family workers in a family firm. While there is a large literature on the employment effects of trade liberalisation on workers in general, we know less about how unpaid family labour is affected. To address this gap, this paper examines the effects of trade liberalisation on unpaid family labour decisions in small family-run firms. I test two competing hypotheses. On one hand, household firms facing intense competition may have a greater incentive to rely on unpaid family workers to keep costs down. On the other hand, these firms might diversity their income by having unpaid family labour to work at other firms to compensate for any loss of income incurred by rising foreign competition. To test these two hypotheses, I rely on a rich panel dataset of manufacturing enterprises that went through trade liberalisation in Vietnam. My findings show that tariff cuts lead to the reallocation of family employees from working at the household firm to working externally. This finding is consistent with income diversification on the part of household firms threatened by competition. These results contribute to the growing evidence of developing countries' labour adjustments in response to trade shocks