Abstract
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.
Highlights
Our goal in this paper is to provide a comprehensive explanation of the links between trade reforms and wages in developing countries
Whereas their study involves one trade reform, we study two episodes of trade liberalization separated by a reversal to protection
A corollary of this result is that since all sectors pay the same wages for skilled labor, the model predicts the existence of different skill premiums at the industry level
Summary
Our goal in this paper is to provide a comprehensive explanation of the links between trade reforms and wages in developing countries. Our model works with an unskilled labor abundant country that in consequence exports unskilled intensive goods and imports skilled intensive goods This feature of the model generates a Stolper-Samuelson type prediction: conditional on the cross-section structure of protection, the economy-wide skill premium moves in the same direction as the average tariff in the economy. After controlling for the structure of tariffs at the industry level, the average tariff in the economy is positively associated with the economy-wide skill premium over time This implies that trade liberalization can benefit the abundant factor which, in developing countries, is unskilled labor.
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