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Trade Liberalization, Wage, and Unemployment: Theory and Evidence from Chile

Author

Listed:
  • Sayaka Takada

    (Research Institute for Economics and Business Administration, Kobe University, JAPAN)

  • Yoshimichi Murakami

    (Research Institute for Economics and Business Administration, Kobe University, JAPAN)

Abstract

We developed a theoretical model that incorporates a fair wage model into a trade model with heterogeneous firms to analyze the effects of trade liberalization on wages and unemployment rates. By introducing a unique setting for the determinant of average wage and different fixed production costs between exporting and domestic firms, the model predicts that lower trade costs lead to lower prices of intermediate inputs, which reduces the production costs for final-goods firms and stimulates their labor demand. Consequently, the model predicts that trade liberalization leads to higher average productivity, thereby raising wages and reducing unemployment rates. The empirical analysis employing exogenous variations in exposures to regional trade agreements (RTAs) across local labor markets in Chile from 2000 to 2006 supported our theoretical predictions. Exploiting industrial variations in tariff reductions derived from the RTA schemes, initial differences in industrial compositions across local labor markets, and the lack of inter-local labor mobility, we found that a reduction in input tariff rates expectedly increased local wages and decreased unemployment rates. These findings were robust to the inclusion of various controls, the control for the endogeneity of the input tariffs, and the use of different regional units of analysis.

Suggested Citation

  • Sayaka Takada & Yoshimichi Murakami, 2025. "Trade Liberalization, Wage, and Unemployment: Theory and Evidence from Chile," Discussion Paper Series DP2025-04, Research Institute for Economics & Business Administration, Kobe University, revised Sep 2026.
  • Handle: RePEc:kob:dpaper:dp2025-04
    as

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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2025-04.pdf
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    References listed on IDEAS

    as
    1. George A. Akerlof & Janet L. Yellen, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 255-283.
    2. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    3. César, Andrés & Falcone, Guillermo & Gasparini, Leonardo, 2021. "Costs and benefits of trade shocks: Evidence from Chilean local labor markets," Labour Economics, Elsevier, vol. 73(C).
    4. Olivier Blanchard & Francesco Giavazzi, 2003. "Macroeconomic Effects of Regulation and Deregulation in Goods and Labor Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 879-907.
    5. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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