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

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  • Manoj Atolia

    (Department of Economics, Florida State University)

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.

Suggested Citation

  • Manoj Atolia, 2002. "Trade Liberalization and Rising Wage Inequality in Latin America: Reconciliation with HOS Theory," Working Papers wp2002_03_01, Department of Economics, Florida State University, revised Feb 2006.
    • Handle: RePEc:fsu:wpaper:wp2002_03_01
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    Cited by:

    1. 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, May.
    2. repec:unu:wpaper:wp2012-03 is not listed on IDEAS
    3. Sámano, Claudia & Szekely, Miguel, 2012. "Did Trade Openness Affect Income Distribution in Latin America? Evidence for the Years 1980-2010," WIDER Working Paper Series 003, World Institute for Development Economic Research (UNU-WIDER).
    4. Jørn Rattsø & Hildegunn E. Stokke, 2013. "Trade, Skill Biased Technical Change and Wage Inequality in South Africa," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 419-431, August.
    5. Rossana Patron & Marcel Vaillant, 2012. "Can Education Policy Address The Wage Gap? A Note On Public Skill Formation In Developing Countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(3), pages 369-378, April.
    6. Gerardo Esquivel, 2011. "The Dynamics of Income Inequality in Mexico since NAFTA," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2011), pages 155-188, August.
    7. Leonardo Gasparini & Nora Lustig, 2011. "The Rise and Fall of Income Inequality in Latin America," Working Papers 1110, Tulane University, Department of Economics.
    8. Gasparini, Leonardo & Galiani, Sebastian & Cruces, Guillermo & Acosta, Pablo A., 2011. "Educational Upgrading and Returns to Skills in Latin America: Evidence from a Supply-Demand Framework, 1990-2010," IZA Discussion Papers 6244, Institute of Labor Economics (IZA).
    9. Yan Ma & Fumio Dei, 2009. "Product Quality, Wage Inequality, and Trade Liberalization," Review of International Economics, Wiley Blackwell, vol. 17(SI), pages 244-260, May.
    10. García Muñoz, Teresa María & Milgram Baleix, Juliette & Odeh, Omar Odeh, 2020. "Inequality in Latin America: The role of the nature of trade and partners," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 14, pages 1-35.
    11. Raymundo Campos & Gerardo Esquivel & Nora Lustig, 2012. "The Rise and Fall of Income Inequality in Mexico, 1989–2010," Working Papers 267, ECINEQ, Society for the Study of Economic Inequality.
    12. Atolia, Manoj & Kurokawa, Yoshinori, 2016. "The impact of trade margins on the skill premium: Evidence from Mexico," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 895-915.
    13. Raymundo Campos & Gerardo Esquivel & Nora Lustig, 2012. "The Rise and Fall of Income Inequality in Mexico, 1989–2010," Working Papers 267, ECINEQ, Society for the Study of Economic Inequality.
    14. 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.
    15. Yoshimichi Murakami, 2018. "Globalization and Income Inequality in Latin America: A Review of Theoretical Developments and Recent Evidence," Discussion Paper Series DP2018-16, Research Institute for Economics & Business Administration, Kobe University, revised Aug 2018.
    16. Camilo Andrés Acosta Mejía, Luis Baldomero-Quintana, 2022. "Quality of Communications Infrastructure, Local Structural Transformation, and Inequality," Documentos de Trabajo CIEF 20505, Universidad EAFIT.
    17. Manoj Atolia, 2010. "Public Investment, Tax Evasion, And The Welfare Effects Of A Tariff Reform," Contemporary Economic Policy, Western Economic Association International, vol. 28(2), pages 219-239, April.
    18. repec:unu:wpaper:wp2012-10 is not listed on IDEAS
    19. Miguel Szekely & Claudia Sámano, 2012. "Did Trade Openness Affect Income Distribution in Latin America? Evidence for the Years 1980-2010," WIDER Working Paper Series wp-2012-003, World Institute for Development Economic Research (UNU-WIDER).
    20. Zhang, Jingjing, 2013. "Factor mobility and skilled–unskilled wage inequality in the presence of internationally traded product varieties," Economic Modelling, Elsevier, vol. 30(C), pages 579-585.
    21. 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;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(2), pages 361-372, July.
    22. Guillermo Cruces & Guido Porto & Mariana Viollaz, 2018. "Trade liberalization and informality in Argentina: exploring the adjustment mechanisms," Latin American Economic Review, Springer;Centro de Investigaciòn y Docencia Económica (CIDE), vol. 27(1), pages 1-29, December.
    23. Miguel Székely & Pamela Mendoza, 2017. "Declining inequality in Latin America: structural shift or temporary phenomenon?," Oxford Development Studies, Taylor & Francis Journals, vol. 45(2), pages 204-221, April.

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    More about this item

    Keywords

    Wage Inequality; Trade Reform; HOS; Capital-Skill Complementarity; Dynamic Analysis;
    All these keywords.

    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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