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Trade liberalization and rising wage inequality in Latin America: Reconciliation with HOS theory

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  • Atolia, Manoj

Abstract

The paper puts forward the hypothesis that transitory effects of trade liberalization on wage inequality can differ from the long-run outcome based on the HOS theory. In cases where HOS theory predicts a decline in wage inequality in the long run, a temporary rise can occur due to (i) asymmetries in the speed of contraction in the import sector and expansion in other sectors, and (ii) capital-skill complementarity in production. Asymmetric contraction and expansion causes transitory capital accumulation that boosts the relative and the real wage of the skilled labor due to capital-skill complementarity. Although long-run HOS fundamentals are, therefore, dominated in short run by the transient effects arising due to capital-skill complementarity, the observed rise in wage inequality is, nevertheless, consistent with the HOS theory appropriately extended to a dynamic setting.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 71 (2007)
Issue (Month): 2 (April)
Pages: 467-494

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Handle: RePEc:eee:inecon:v:71:y:2007:i:2:p:467-494

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Web page: http://www.elsevier.com/locate/inca/505552

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Citations

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Cited by:
  1. Raymundo Campos & Gerado Esquivel & Nora Lustig, 2012. "The Rise and Fall of Income Inequality in Mexico, 1989-2010," Working Papers 1201, Tulane University, Department of Economics.
  2. Julian Emami Namini & Ricardo A. López, 2013. "Factor price overshooting with trade liberalization: theory and evidence," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(2), pages 139-181, 05.
  3. Gasparini, Leonardo & Galiani, Sebastian & Cruces, Guillermo & Acosta, Pablo, 2011. "Educational upgrading and returns to skills in Latin America : evidence from a supply-demand framework, 1990-2010," Policy Research Working Paper Series 5921, The World Bank.
  4. Gerardo Esquivel, 2010. "The dynamics of income inequality in Mexico since NAFTA," Serie documentos de trabajo del Centro de Estudios Económicos 2010-09, El Colegio de México, Centro de Estudios Económicos.
  5. Leonardo Gasparini & Nora Lustig, 2011. "The Rise and Fall of Income Inequality in Latin America," CEDLAS, Working Papers 0118, CEDLAS, Universidad Nacional de La Plata.
  6. Manoj Atolia, 2003. "Public Investment, Tax Evasion and Welfare Effects of a Tariff Reform," Working Papers wp2003_10_01, Department of Economics, Florida State University, revised Oct 2008.
  7. Manoj Atolia & Yoshinori Kurokawa, 2008. "Variety Trade and Skill Premium in a Calibrated General Equilibrium Model: The Case of Mexico," Working Papers wp2008_11_03, Department of Economics, Florida State University.
  8. Szekely, Miguel & Samano, Claudia, 2012. "Did Trade Openness Affect Income Distribution in Latin America? Evidence for the years 1980.2010," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  9. Sebastián Galiani & Guido Porto, 2011. "Trends in Tariff Reforms and Trends in the Structure of Wages," CEDLAS, Working Papers 0124, CEDLAS, Universidad Nacional de La Plata.
  10. Arslan Razmi, 2009. "Can the HOSS framework help shed light on the simultaneous growth of inequality and informalization in developing countries?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 145(2), pages 361-372, July.

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