We examine how trade sanctions affect theallocation of workers across formal and informal employment. We analyse thecase of unprecedented trade sanctions imposed on Iran in 2012 and use a difference-in-differences approach to compare the probability ofworking in the informal sector before and after 2012 for individuals employedin industries with pre-existing different levels of exposure to internationaltrade. Our findings suggest that, in the short run, the informal sector absorbeda significant fraction of workers displaced by the trade shock caused by thesanctions, shedding light on a potentially important dimension of laborreallocation whereby trade sanctions can affect the economy of the targetcountry.

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