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

  • Manoj Atolia


    (Department of Economics, Florida State University)

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 Function: Revised version, 2006-02
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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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