Trade liberalization and wage inequality: Evidence from Chile

Abstract

This study analyzes the impacts of further tariff reductions resulting from the proliferation of regional trade agreements on wage inequality between skilled and unskilled workers in Chile in the 2000s. I match panel data on industry-level effective tariff rates and other industry variables calculated from plant-level microdata to pooled individual cross-section data from national household surveys at the industry level. Based on this unique data set, I estimate the impacts of effective tariffs on workers’ wages directly in one stage. I find that a reduction in effective tariffs on final goods leads to an increase in industry wage and skill premiums. Moreover, the impact on the industry skill premiums is larger for skilled workers employed in large-sized firms. Therefore, the findings indicate that increased import competition due to reductions in output tariffs leads to skill upgrading within industries, thereby increasing demand for skilled workers. The results are robust to the possible endogeneity of effective tariffs and the inclusion of industry-level productivity.