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Trade Liberalization and Rising Wage Inequality in Latin America: Reconciliation with HOS Theory

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Author Info
Manoj Atolia () (Department of Economics, Florida State University)

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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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File URL: ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2002_03_01.pdf
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Paper provided by Department of Economics, Florida State University in its series Working Papers with number wp2002_03_01.

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Length: 38
Date of creation: Mar 2002
Date of revision: Feb 2006
Handle: RePEc:fsu:wpaper:wp2002_03_01

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Related research
Keywords: Wage Inequality; Trade Reform; HOS; Capital-Skill Complementarity; Dynamic Analysis;

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Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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References listed on IDEAS
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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. 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. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
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