Trade, Wages and the Political Economy of Trade Protection: Evidence from the Colombian Trade Reforms

53 Pages Posted: 19 Jun 2003

See all articles by Pinelopi Goldberg

Pinelopi Goldberg

Yale University - Department of Economics; National Bureau of Economic Research (NBER); Yale University - Cowles Foundation

Nina Pavcnik

Dartmouth College - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: April 2003

Abstract

Worker industry affiliation plays a crucial role in how trade policy affects wages in many trade models. Yet, most research has focused on how trade policy affects wages by altering the economy-wide returns to a specific worker characteristic (i.e. skill or education) rather than through worker-industry affiliation. This Paper exploits drastic trade liberalizations in Colombia in the 1980s and 1990s to investigate the relationship between protection and industry wages. Using the Colombian National Household Survey we first compute industry wage premiums, adjusting for a series of worker, job, and firm characteristics. We find that Colombian industry wage premiums exhibit remarkably less persistence over time than US wage premiums. Similarly, tariffs are less correlated over time than in the US data, indicating that trade liberalization has changed the structure of protection. We next relate wage premiums to trade policy in a framework that accounts for the political economy of trade protection. Accounting for time-invariant political economy factors is critical. When we do not control for unobserved time-invariant industry characteristics, we find that workers in protected sectors earn less than workers with similar observable characteristics in unprotected sectors. Allowing for industry fixed effects reverses the result: trade protection increases relative wages. This positive relationship persists when we instrument for tariff changes. Our results are in line with short- and medium-run models of trade where labour is immobile across sectors, or, alternatively, with the existence of industry rents that are reduced by trade liberalization. In the context of the current debate on the rising income inequality in developing countries, our findings point to a source of disparity beyond the well-documented rise in the economy-wide skill premium: because tariff reductions were proportionately larger in sectors employing a high fraction of less-skilled workers, the decrease in the wage premiums in these sectors affected such workers disproportionately.

Keywords: Trade policy, wages, political economy, Colombia

JEL Classification: F10, F13, J31

Suggested Citation

Goldberg, Pinelopi (Penny) and Pavcnik, Nina, Trade, Wages and the Political Economy of Trade Protection: Evidence from the Colombian Trade Reforms (April 2003). CEPR Discussion Paper No. 3877. Available at SSRN: https://ssrn.com/abstract=415820

Pinelopi (Penny) Goldberg (Contact Author)

Yale University - Department of Economics ( email )

P.O. Box 208268
37 Hillhouse Avenue
New Haven, CT 06520-8268
United States
203-432-3569 (Phone)
203-432-6323 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
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Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Nina Pavcnik

Dartmouth College - Department of Economics ( email )

6106 Rockefeller Hall
Hanover, NH 03755
United States
603-646-2537 (Phone)
603-646-2122 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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