Trade Liberalisation and Factor Returns

This paper analyses the effects of New Zealand's trade liberalisation on its factor markets. Although the consensus among most existing empirical studies is that there is little contribution of trade in increasing wage inequality, disagreement remains regarding the appropriate methodology. Recognising the importance of taking account of general equihbrium considerations, this paper follows the factor content of trade formulation proposed by Deardorff and Staiger (1988) and Deardorff and Lattimore (1999a, b). It is found that, in contrast to the income distribution widening effect, Ncw Zealand's trade reforms have reduced skill premiums when the comparison is made between 1986 and 1996. This result is consistent with Deardorff and Lattimore (1999a, b). Furthermore Data of personal income distribution by qualifications are investigated. From 1986 to 1996, a tendency of income dstribution widening is found. If the relative factor returns and personal income distribution by qualifications are hlghly correlated, it suggests that trade liberatisation has helped reduce income inequality while somc other factors have led to the widening of the income distribution.