The effects of trade openness on rural-urban sectoral employment, wages, and earnings: Evidence from Peru's second wave of trade liberalization

Abstract

The effects of trade liberalization on wages, inequality, and employment in middle-income countries remains an important empirical question. However, with few exceptions, most of the empirical literature has focused on aggregate impacts at a national or regional level and the effects on skilled versus unskilled workers. This paper focuses on the effects of trade liberalization on industry-specific wages, earnings, and employment in rural and urban areas of Peru, providing more nuanced evidence on the distributional effects of trade. We use an instrumental variable approach and different measures of trade liberalization for the 2001–2016 period. Our main results suggest that, first, trade openness is associated with an increase in urban workers’ earnings and wages, with self-employed workers benefitting the most. Second, whereas wages of workers with low and high levels of education decrease as a consequence of trade openness, the earnings of self-employed workers are affected positively, benefiting unskilled workers the most. In addition, while earnings increase in almost all industries in both rural and urban areas, effects are heterogeneous for wages. Overall, both salaried and self-employed agricultural workers benefitted from trade openness, indicative that agriculture is a competitive sector with important export potential.