Trade liberalization and wage inequality

Journal of Policy Modeling, 1998

In an era of globalisation, patterns of economic growth and employment will depend critically upon domestic labour market conditions. This paper presents empirical evidence on how labour market regulations might interact with expanded trade. We present numerical model simulations of recent trade reform proposals for Chile. Firstly, we analyse how these reforms affect the economy in a perfectly competitive labour markets framework, then we modify this by introducing various kind of labour market imperfections considered relevant in this country. Previous research efforts usually focused separately either on the significance of trade, or on the effect of labour market regulations as explanations for variations in the wage gap and labour demand. Our results show that interactions between labour market regulations and expanded trade may explain the Chilean widening wage gap.

Journal of International Economics, 2007

IMF Working Papers

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Using Chilean data, we document that for resource-rich small open economies the effects of terms of trade shocks on the wage gap (between skilled and unskilled workers) depend on factor intensities in the non-tradable sector, following the model in Galiani, Heymann, and Magud (2010). For a skilled-intensive non-tradable sector we show that improvements in the terms of trade benefit skilled workers. We also show that this relation holds at the industry level: the wage gap widens in skilled-intensive sectors while it shrinks in unskilled-intensive ones, the more so as terms of trade volatility decreases.

The Journal of Developing Areas, 2016

Contrary to the predictions of the 2x2x2 Heckscher-Ohlin model, empirical evidence shows that trade openness causes the skill premium to increase in some developing countries and to decrease in others. This paper introduces a North South setup, where the labor force is divided into skilled and unskilled workers. There are two types of firms: producers of final goods and producers of intermediate goods. There are two types of final goods: a complex good and a simple good. The former is produced utilizing skilled workers, and a range of complex complementary intermediates. The latter is produced utilizing skilled and unskilled workers, and a range of simple complementary intermediates. Complex and simple intermediates are produced by technology monopolists in the North, and used by producers of final goods both in the North and in the South. The results suggest that while the wage gap increases in the North after trade liberalization, the increase in the South depends upon skill acquisition and the subsequent skill bias. The skill premium is the ratio of the weighted average wage of all skilled workers to that of the unskilled workers. The wage of skilled workers is a weighted average of the wage of the skilled workers in the complex sector and in the simple sector. In the South, trade openness causes a decrease in the wage of the former and an increase in the wage of the latter. If the portion of the latter is higher than that of the former, the average wage of skilled workers and the skill premium increase after trade liberalization. Otherwise, the skill premium declines. Therefore, the effect of trade liberalization on the skill premium in the South depends on the level of overeducation.

Atlantic Economic Journal, 2000

The objective of this paper is to investigate the relationship between net exports and wage inequality in the U.S. The short-and long-run analyses of the U.S. trade and wage data are undertaken. Cointegration test results indicate that net exports and wage inequality are related in the long run. The main contribution of this paper lies in its focus on the short-run investigation of the relationship between net exports and wage inequality. This investigation was conducted using the vector error correction (VEC) testing framework. Contrary to the prevailing view, the VEC test results indicate that trade has no statistically significant impact on wage inequality in the U.S. Instead, the empirical evidence shows a negative causal impact of wage inequality on net exports.

The Developing Economies, 2012

During the 1990s, several Latin American countries implemented policies directed to the removal of barriers on international trade. However, there is a perception that reforms, especially trade liberalization, failed to deliver on their promises, easing the way for policies aimed at reversing some of them. Following Wood's hypothesis, we allow for the effects of liberalization to vary, depending on the skill intensity of production. The evidence confirms that the role of trade liberalization has been relatively small, but controlling for the presence of endogeneity gives larger estimates. Contrary to previous evidence, the wage premium of skilled workers was more sensitive to the increase of skill-intensive exports than to that of unskilled-intensive imports.

Economic Inquiry, 2004

The relationship between trade liberalization and inequality has received considerable attention in recent years. The primary purpose of this paper is to present new results on the sources of wage inequalities in manufacturing taking into account South-South (S-S) trade. Globalization not only leads to increasing North-South (N-S) trade, but the direction and composition of trade has also changed. More trade is carried out between developing countries. We observe increasing wage inequality is more due to the South-South trade liberalization than to the classical trade liberalization with northern countries. The second purpose is to elucidate the link between the direction of trade and technological change, arguing that it might explain why we obtain different results for South-South trade and North-South trade on wage inequality. A part of this increasing wage inequality due to S-S trade comes from the development of N-S trade relationship in S-S trade which increases wage inequality in middle income developing countries. However the fact that S-S trade is more skill intensive sector oriented increase wage inequality for all developing countries.

2013

How does trade liberalization affect wage inequality? A large literature examines this question, focusing mainly on changes in the skill premium. In this paper we consider an underexplored aspect of wage inequality in the trade literature—gender inequality. Aside from equity concerns, the effect of liberalization policies on gender outcomes may be of interest from a long-run growth perspective since there is now growing evidence that empowering women promotes education and better children’s outcomes (see Duflo 2012). Thus, in our view, the impact of trade openness on gender inequality is an important question which deserves equal attention to that given to skill premia. Using household surveys from Mexico, Aguayo-Tellez et al. (forthcoming) conclude that during the establishment of the North American Free Trade Agreement (NAFTA), women’s relative wage increased even as their relative employment rates increased, suggesting that demand for female labor increased in the economy as a wh...

Review of Development Economics, 2006

This paper examines wage inequality in the manufacturing sector for a panel of Latin American and East Asian economies during the last three decades. A labor supply and demand model is presented where three main determinants of wage inequality are investigated: trade openness, technology transfer, and labor supply. Findings indicate that wage inequality in the two regions has responded differently to the various determinants enumerated above. Some lessons from the comparative experience of the two regions are drawn.

Journal of Development Economics, 2001

The paper presents a general framework for the analysis of the evolution of personal income distribution following trade liberalization. The model allows many factors of production and the possibility of capital gains. In this framework, the short run evolution of inequality depends on the wage to wealth ratio, while changes in the interest rate determine the changes in long run inequality. The general framework is applied to the dynamic Ž Ž. . specific factors model of Eaton Rev. Econ. Stud., VLIV 1987. In this model, the land-labor ratio determines whether a country exports the land-using or the capital-using good in the long run. The type of the export good determines the effects of liberalization on Ž. Ž. inequality. In land labor-abundant countries, inequalities increase decrease along the dynamic path. The model provides an explanation for the differences between Latin American and Asian countries in their response to trade liberalization. Econometric analysis provides mixed results for these predictions, with the correct signs but non-significant coefficients for the coefficient on the interaction between openness and the land-labor ratio.

2011

This paper examines the relationship between wage gaps among twenty-nine sectors of the Chilean economy and differences in levels of openness as measured by trade and investment flows. Over the last three decades, this country liberalized its trade and foreign direct investment, which accelerated growth of flows in both areas, provoking in turn important changes in the labor market. Using cluster analysis, we divide 29 sectors into three groups of high, medium and low levels of trade and investment openness in 2003 and 2008. Subsequently, an average wage equation is estimated for salaried workers in each group based on their characteristics (gender, education, experience and union membership) using the Supplementary Income Survey (SIS) micro database. Differences between average wages in the three groups are decomposed with the Oaxaca-Blinder method. In accordance with the existing literature on the subject, the results show that the most open group of sectors pays a 'wage premium' to its workers. Moreover, we introduce labor market institutions as an additional factor explaining sectoral wage gaps. In particular, it turns out that the higher level of labor unionization in the most open group of sectors seems to explain most of the 'wage premium' to its workers.

Sebastian Galiani, Guido G Porto; Trends in Tariff Reforms and in the Structure of Wages. The Review of Economics and Statistics 2010; 92 (3): 482–494. doi: https://doi.org/10.1162/REST_a_00003, 2010

This paper provides new evidence on the impacts of trade reforms on wages. Instead of achieving identification by comparing industrial wages before and after one episode of trade liberalization, our strategy exploits the recent historical record of policy changes adopted by Argentina: from significant protection in the early 1970s, to the first episode of liberalization during the late 1970s, back to a slowdown of reforms during the 1980s, to the second episode of liberalization in the 1990s. These swings in trade policy comprise broken trends in trade reforms that we can compare with observed trends in wages and wage inequality. We use unusual historical data sets of trends in tariffs, wages, and wage inequality to examine the structure of wages in Argentina and to explore how it is affected by tariff reforms. We find that i) trade liberalization, ceteris paribus, reduces wages; ii) industry tariffs reduce the industry skill premium; iii) conditional on the structure of tariffs at the industry level, the average tariff in the economy is positively associated with the average skill premium. To explain these results, we present a model that combines a non-competitive wage setting mechanism due to unions with a factor abundance hypothesis. Overall, our work suggests that the observed trends in wage inequality in Latin America can be consistent with the Stolper-Samuelson predictions in a model with unions.

International Trade eJournal, 2015

This paper develops a multi-sector full-employment general equilibrium model with internationally non-traded goods and international fragmentation in skill-intensive production, to understand the mechanism how trade-induced growth in the skill-intensive sector is mediated to informal sector wages and employment through the existence of finished non-tradable and the corresponding domestic demand-supply forces. The underlying developing economy is characterised by dual unskilled labour market with unionised formal and non-unionised informal sectors, consistent with the empirical literature on developing economies India. Numerical analysis has also been performed to simulate how the changes in elasticities of factor substitution in production in different sectors account for the movement in informal wage and therefore the movement in skilled–unskilled wage gap. This paper challenges the view that the relative wage-inequality in a DC like India with rigid organised sector labour market ...

The World Economy, 2008

This paper provides empirical assessments of one of the leading explanations for the increase in skill premium in Mexico and Argentina during the 1990s: trade liberalisation. We provide evidence that imports increase skill premium in Mexico, while exports reduce it. In Argentina, overall trade increased skill premium in the early 1990s (the beginning of trade reforms), although it reduced it later in the decade. These results are helpful for a comparison between South-South integration, FTAA or bilateral FTAs with Northern economies as alternative trade policy options for Latin American countries.

2013

This chapter examines the relationship between wages and levels of trade and FDI openness in twenty-nine sectors of the Chilean economy. Over the last four decades, this country almost fully liberalised its trade and foreign direct investment, which accelerated growth of flows in both areas and contributed to important changes in the labour market. Using cluster analysis, we divide 29 sectors into three groups of high, medium and low levels of trade and foreign direct investment penetration in 2003 and 2008. Subsequently, an average wage equation is estimated for salaried workers in each group based on their characteristics (gender, education, work experience and union membership) using microdata of the Supplementary Income Survey (SIS) database. Differences between average wages of the three groups are decomposed with the Oaxaca-Blinder method. The results confirm that the group of most open sectors pays a “wage premium ” to its workers. It is also shown that most of this premium i...