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

Manoj Atolia ()

No wp2002_03_01, Working Papers from Department of Economics, Florida State University

Abstract: 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.

Keywords: Wage Inequality; Trade Reform; HOS; Capital-Skill Complementarity; Dynamic Analysis (search for similar items in EconPapers)
JEL-codes: F11 F13 F17 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-lab
Date: Written
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ftp://econpapers.fsu.edu/RePEc/fsu/wpaper/wp2002_03_01.pdf Revised version, 2006-02 (application/pdf)

Related works:
Journal Article: Trade liberalization and rising wage inequality in Latin America: Reconciliation with HOS theory (2007)
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