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Trade liberalization and rising wage inequality in Latin America: Reconciliation with HOS theory

  • Atolia, Manoj

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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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 71 (2007)
Issue (Month): 2 (April)
Pages: 467-494

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Handle: RePEc:eee:inecon:v:71:y:2007:i:2:p:467-494
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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