Liberalizing Trade and Capital Flows and the Wage Gap: Does Sequencing Matter?

Abstract

We consider a small open developing economy with presence of both final and intermediate goods where we analyze the impact of liberalizing trade and capital flows on wage inequality when such policies are undertaken in a sequence. Our findings suggest that when skilled sector is capital intensive relative to the unskilled sector, wage gap always increases independent of the sequence of reforms, but the extent of such increase may vary according to the chosen sequence. However, when unskilled intensive sector is more capital intensive, the impact of these reforms on skilled-unskilled wage gap is ambiguous. Later we also demonstrate the robustness of our results to alternative assumptions on the structure of the model.