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Trade, Wages and the Political Economy of Trade Protection: Evidence from the Colombian Trade Reforms

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Author Info
Goldberg, Pinelopi Koujianou
Pavcnik, Nina

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Abstract

Worker industry affiliation plays a crucial role in how trade policy affects wages in many trade models. Yet, most research has focused on how trade policy affects wages by altering the economy-wide returns to a specific worker characteristic (i.e. skill or education) rather than through worker-industry affiliation. This Paper exploits drastic trade liberalizations in Colombia in the 1980s and 1990s to investigate the relationship between protection and industry wages. Using the Colombian National Household Survey we first compute industry wage premiums, adjusting for a series of worker, job, and firm characteristics. We find that Colombian industry wage premiums exhibit remarkably less persistence over time than US wage premiums. Similarly, tariffs are less correlated over time than in the US data, indicating that trade liberalization has changed the structure of protection. We next relate wage premiums to trade policy in a framework that accounts for the political economy of trade protection. Accounting for time-invariant political economy factors is critical. When we do not control for unobserved time-invariant industry characteristics, we find that workers in protected sectors earn less than workers with similar observable characteristics in unprotected sectors. Allowing for industry fixed effects reverses the result: trade protection increases relative wages. This positive relationship persists when we instrument for tariff changes. Our results are in line with short- and medium-run models of trade where labour is immobile across sectors, or, alternatively, with the existence of industry rents that are reduced by trade liberalization. In the context of the current debate on the rising income inequality in developing countries, our findings point to a source of disparity beyond the well-documented rise in the economy-wide skill premium: because tariff reductions were proportionately larger in sectors employing a high fraction of less-skilled workers, the decrease in the wage premiums in these sectors affected such workers disproportionately.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3877.

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Date of creation: Apr 2003
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Handle: RePEc:cpr:ceprdp:3877

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Related research
Keywords: colombia; political economy; trade policy; wages;

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Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eslava, Marcela & Haltiwanger, John C. & Kugler, Adriana & Kugler, Maurice, 2009. "Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia," IZA Discussion Papers 4256, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Donald Robbins, 2003. "The impact of trade liberalization upon inequality in developing countries - A review of theory and evidence–," DOCUMENTOS DE ECONOMÍA 003601, UNIVERSIDAD JAVERIANA - BOGOTÁ. [Downloadable!]
  3. Heyman, Fredrik & Gustavsson Tingvall, Patrik & Sjöholm, Fredrik, 2006. "Is There Really a Foreign Ownership Wage Premium? Evidence from Matched Employer-Employee Data," Working Paper Series 674, Research Institute of Industrial Economics. [Downloadable!]
    Other versions:
  4. Hoekman & Bernard & Winters, L. Alan, 2005. "Trade and employment : stylized facts and research findings," Policy Research Working Paper Series 3676, The World Bank. [Downloadable!]
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  5. Porto, Guido G., 2003. "Trade reforms, market access, and poverty in Argentina," Policy Research Working Paper Series 3135, The World Bank. [Downloadable!]
  6. Amiti, Mary & Konings, Jozef, 2005. "Trade Liberalization, Intermediate Inputs and Productivity: Evidence from Indonesia," CEPR Discussion Papers 5104, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Goh, Chor-Ching & Smarzynska Javorcik, Beata, 2005. "Trade Protection and Industry Wage Structure in Poland," CEPR Discussion Papers 4929, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Thierry Verdier, 2005. "Intégration commerciale « socialement responsable » : une approche en termes d'économie politique," Revue d’économie du développement, De Boeck Université, vol. 19(4), pages 55-121. [Downloadable!]
  9. T. H. Gindling, 2003. "La Desigualdad En América Central Durante Los Años Noventa," UMBC Economics Department Working Papers 03-109, UMBC Department of Economics. [Downloadable!]
  10. Charles Ackah, & Oliver Morrissey, & Simon Appleton, . "Who Gains from Trade Protection in Ghana? A Household-Level Analysis," Discussion Papers 07/02, University of Nottingham, CREDIT. [Downloadable!]
  11. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2003. "The Response of the Informal Sector to Trade Liberalization," CEPR Discussion Papers 3874, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  12. Attanasio, Orazio & Goldberg, Pinelopi & Pavcnik, Nina, 2003. "Trade Reforms and Wage Inequality in Colombia," CEPR Discussion Papers 4023, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  13. Taruna Shalini RAMESSUR & Sanjeev K SOBHEE, 2009. "Impact Of Trade Liberalisation On Labour Conditions On The Textile Sector Of Mauritius: The Fate Of Female Workers," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 9(2). [Downloadable!] (restricted)
  14. T. H. Gindling & Juan Diego Trejos, 2003. "Accounting for Changing Inequality in Costa Rica, 1980-1999," UMBC Economics Department Working Papers 03-108, UMBC Department of Economics. [Downloadable!]
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