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

Posted: 16 Oct 2008

See all articles by Manoj Atolia

Manoj Atolia

Florida State University - Department of Economics

Date Written: April 2007

Abstract

The paper puts forward the hypothesis that the transitory effects of trade liberalization on wage inequality can differ from the long-run outcome. In cases where the HOS theory predicts a decline in wage inequality in the long run, a temporary rise can, nevertheless, occur due to (i) the asymmetries in the speed of contraction in the import sector and expansion in other sectors, and (ii) the capital-skill complementarity in production. The asymmetric contraction and expansion causes a transitory capital accumulation that boosts the relative and the real wage of skilled labor due to capital-skill complementarity. Although the long-run HOS fundamentals are, therefore, dominated in the short run by the transient effects arising due to capital-skill complementarity, the observed rise in wage inequality is nonetheless consistent with the HOS theory appropriately extended to a dynamic setting.

Keywords: Wage inequality, Trade reform, HOS, Capital-skill complementarity, Dynamic analysis

JEL Classification: F11, F13, F17, J31

Suggested Citation

Atolia, Manoj, Trade Liberalization and Rising Wage Inequality in Latin America: Reconciliation with HOS Theory (April 2007). Journal of International Economics, Vol. 71, No. 2, 2007. Available at SSRN: https://ssrn.com/abstract=1284743

Manoj Atolia (Contact Author)

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States
+1.850.644.7088 (Phone)
+1.850.644.4535 (Fax)

HOME PAGE: http://mailer.fsu.edu/~matolia/

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