Wage Inequality and Structural Reform: Evidence from Colombia

Abstract

This paper applies a simple two-factor framework that separates shifts in the relative supply of and demand for more educated workers. The results indicate that the decrease in the skill premium between 1976 and 1981 is related to the reduction in the relative demand for skilled workers, and the post-1991 increase in relative wages can be attributed to the rapid increase in their relative demand. Changes in relative supply are less helpful in explaining differences in relative wage behavior across periods. Moreover, the paper argues that trade liberalization is not the driving force behind changes in relative demand. In fact, changes in the share of skilled employment have taken place within industries, rather than involving a sharp sectorial reallocation of workers. We emphasize skill complementary technological change as the key factor behind changes in the relative demand. Further evidence in this direction is provided by the fact that the largest changes in the relative earnings of the more educated workers have taken place in non-traded sectors.

JEL Classification: J31