NBER Reporter: Fall 2000
Rauch and Trindade model the home country's familiarity with business opportunities in a foreign country as a parameter in a matching process between domestic and foreign firms. They show that as familiarity increases: the effect of relative national labor supplies on relative national wages declines; the elasticity of domestic labor demand increases; and the extent of "pass-through" of trade tax changes to home wages increases. Since the volume of trade is increasing in familiarity, trade liberalization has a greater impact on wages when the initial volume of trade is greater, all else being equal. As familiarity becomes complete, the results of the 2 x 2 Heckscher-Ohlin-Samuelson model are obtained. Relative national wages are fixed by trade taxes independent of relative national labor supplies; domestic labor demand is infinitely elastic; and pass-through of tax changes to wages is "complete" in the sense that it is determined entirely by production technology and no arbitrage opportunities remain.
Sanguinetti and Galiani study the relationship between trade liberalization and relative wages in Argentina. They define skilled labor in terms of precise educational categories, and they control for a number of individual characteristics -- sex, age, and work experience -- that also affect wages. The authors find that trade flows, industrial employment, and relative prices all move following trade liberalization according to what a simple version of the Heckscher-Ohlin model would have predicted for an economy such as Argentina's. Also, trade liberalization appears to increase the college wage premium. Still, similar to what has been found for some developed economies, a deepening of trade can only explain a small portion of the observed rise in wage inequality.
Slaughter addresses the labor-market impacts of trade and foreign direct investment (FDI) liberalization in developing countries. His central message is that many developing countries recently have seen income inequality rise, not fall, after a liberalization of trade and FDI. These increases in inequality contradict the benchmark Heckscher-Ohlin intuition commonly applied to developing-country liberalization. Thus, developing-country policymakers should not regard liberalization as a sure-fire poverty-reduction program. Of course, it is possible that rising inequality can co-exist with declines in absolute poverty.
The income of the bottom fifth of the population rises one-for-one with overall growth in per capita GDP in a sample of 80 countries over four decades. The effect of growth on the income of the poor is no different in poor countries than in rich ones, nor do incomes of the poor fall more than proportionately during economic crises. Further, the poverty-growth relationship has not changed in recent years. Dollar and Kraay show that policy-induced growth still is as good for the poor as for the overall economy; openness to foreign trade, good rule-of-law, and fiscal discipline all benefit the poor to the same extent that they benefit the whole economy. Avoidance of high inflation is particularly good for the poor: that is, high inflation is more harmful to the income of the poor than to GDP overall. In contrast, Dollar and Kraay find no evidence that formal democratic institutions, or public spending on health and education, have systematic effects on incomes of the poor.
Behrman, Birdsall, and Székely develop and apply a new approach to the estimation of the impact of economy-wide reforms on wage differentials. They use a new high-quality dataset on wage differentials by schooling level for 18 Latin American countries for the period 1980-98. Their results indicate that reform overall has had a short-run disequalizing effect on expanding wage differentials, although this effect tends to fade away over time. This disequalizing effect is attributable to the strong impact of domestic financial market reform, capital account liberalization, and tax reform. On the other hand, privatization has contributed to narrowing wage differentials, and trade openness has had no effect on wage differentials. Technological progress, not trade flows, appears to be one channel through which reforms are affecting inequality. The authors also explore the effects of reforms on wage levels. Their tentative results suggest that reforms have had a positive effect on real average wages, but a negative effect on the wages of less-educated workers.
Beyer tries to build a better picture of the evolution of wage inequality in Chile, using a technique originally developed by Juhn et al. (1993) to decompose the changes in the wage distribution data. He finds that these changes to a great extent are attributable to changes in observable prices. On the other hand, these changes are explained mainly by changes in the return to education, specifically increases in the private return to university education and a decline in the returns to primary and secondary education.
Esquivel and Rodríguez-López review the effect of the North American Free Trade Agreement on Mexico's labor markets. Unlike most of the literature, their research focuses on the level and composition of employment in the 1990s rather than on wage differentials or wage inequality patterns. The authors argue that this change of perspective helps to shed light on the true effect of trade policies on labor markets, while avoiding the identification problems associated with studies that focus only on wage trends. They provide empirical evidence that Mexico's labor market had a period of job-destruction (following the unilateral trade liberalization of the mid-1980s) and then a period of job-creation (following NAFTA's implementation). The authors then claim that this pattern is exactly what would have been predicted by a standard model of trade liberalization and the labor market.