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Impact of Trade Liberalization on Wage Skill Premium in Philippine Manufacturing

  • Aldaba, Rafaelita M.

The paper aims to examine how trade liberalization affects wage premium at the firm level. Using effective protection rate as trade proxy, the paper assumes that in the face of increasing competition, an import-substituting firm may decide to remain at the low value-added stage of the production process which requires relatively less skilled workers and suggests a decline in the wage premium. On the other hand, a firm may move away from the product whose protection rate has fallen and shift and expand toward a higher value-added activity. This would require relatively more skilled workers suggesting an increase in the wage premium. The main findings of the paper show that: First, trade liberalization lowers the wage premium. A firm responds to import competition by shifting to the manufacture of products with lower value added and importing intermediate inputs rather than producing these within the plant. Second, using ASEAN tariff rates as trade proxy, the same results are obtained, however, when ASEAN tariff is interacted with skill intensity, the results show that tariff reduction on skill-intensive products is associated with rising wage skill premium. Third, firm characteristics such as skill intensity, firm size, and capital labor ratio matter in assessing the impact of trade reform on the wage premium. Lastly, exports are associated with increasing wage premium at the firm level the higher their skill intensity. In the literature, greater openness is associated with skill-biased technological change with export-oriented and technology-intensive activities as channels.

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Paper provided by Philippine Institute for Development Studies in its series Discussion Papers with number DP 2013-25.

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Length: 33
Date of creation: 2013
Date of revision:
Handle: RePEc:phd:dpaper:dp_2013-25
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  1. Berman, Eli & Bound, John & Griliches, Zvi, 1994. "Changes in the Demand for Skilled Labor within U.S. Manufacturing: Evidence from the Annual Survey of Manufactures," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 367-97, May.
  2. Amiti, Mary & Cameron, Lisa, 2011. "Trade Liberalization and the Wage Skill Premium: Evidence from Indonesia," CEPR Discussion Papers 8382, C.E.P.R. Discussion Papers.
  3. Revenga, Ana, 1997. "Employment and Wage Effects of Trade Liberalization: The Case of Mexican Manufacturing," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S20-43, July.
  4. Hasan, Rana & L. Jandoc, Karl Robert, 2010. "Trade Liberalization and Wage Inequality in the Philippines," ADB Economics Working Paper Series 195, Asian Development Bank.
  5. Ann Harrison & Gordon Hanson, 1999. "Who Gains from Trade Reform? Some Remaining Puzzles," NBER Working Papers 6915, National Bureau of Economic Research, Inc.
  6. 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.
  7. Lawrence F. Katz & Kevin M. Murphy, 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," NBER Working Papers 3927, National Bureau of Economic Research, Inc.
  8. Bernard Hoekman & Alan L. Winters, 2005. "Trade and Employment: Stylized Facts and Research Findings," Working Papers 7, United Nations, Department of Economics and Social Affairs.
  9. Daron Acemoglu, 2003. "Patterns of Skill Premia," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 199-230.
  10. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
  11. Thoenig, Mathias & Verdier, Thierry, 2002. "A Theory of Defensive Skill-based Innovation and Globalization," CEPR Discussion Papers 3416, C.E.P.R. Discussion Papers.
  12. Orazio Attanasio & Pinelopi Goldberg & Nina Pavcnik, 2003. "Trade Reforms and Wage Inequiality in Colombia," NBER Working Papers 9830, National Bureau of Economic Research, Inc.
  13. Orbeta, Aniceto Jr. C., 2002. "Globalization and Employment: The Impact of Trade on Employment Level and Structure in the Philippines," Discussion Papers DP 2002-04, Philippine Institute for Development Studies.
  14. Cragg, Michael Ian & Epelbaum, Mario, 1996. "Why has wage dispersion grown in Mexico? Is it the incidence of reforms or the growing demand for skills?," Journal of Development Economics, Elsevier, vol. 51(1), pages 99-116, October.
  15. John M. Abowd & Richard B. Freeman, 1991. "Immigration, Trade, and the Labor Market," NBER Books, National Bureau of Economic Research, Inc, number abow91-1, May.
  16. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Wiley Blackwell, vol. 70(2), pages 317-341, 04.
  17. Aldaba, Rafaelita M., 2010. "Does Trade Protection Improve Firm Productivity? Evidence from Philippine Micro Data," Discussion Papers DP 2010-32, Philippine Institute for Development Studies.
  18. Desjonqueres, Thibaut & Machin, Stephen & Van Reenen, John, 1999. " Another Nail in the Coffin? Or Can the Trade Based Explanation of Changing Skill Structures Be Resurrected?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 101(4), pages 533-54, December.
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