Trade Liberalization and Wage inequality: Evidence from Chile

This study analyzes the impacts of further tariff reductions resulting from the proliferation of regional trade agreements on wage inequality between skilled and unskilled workers in Chile in the 2000s. Thus, we use data on effective tariff rates instead of uniform most-favored-nation rates to measure trade liberalization. We match panel data on industry characteristics, including effective tariff rates, to pooled individual cross-section data from national household surveys at the industry level. We find that the reductions in effective tariffs on final goods increase industry wage premiums, thus suggesting that liberalization-induced productivity improvements lead to higher wages. However, considering the differential impacts on different skill groups, we find that the reductions significantly increase industry wage premiums only for skilled workers, thereby increasing wage inequality. Moreover, the impact is larger in skilled workers employed in large-sized firms. The results are robust to the inclusion of other industry characteristics, including input tariffs, the share of foreign-owned capital, and payments to foreign technology. The results are also robust to the inclusion of industry productivity, which is likely to affect the effective tariffs and industry wage premiums simultaneously, as well as control for the potential endogeneity of trade policy.