Archive for February 20, 2015

TRADE REFORM: Wage Inequality and Globalization 5

February 20, 2015

To control for institutional features of labor markets, we include plant shares of social-security contributions, non-wage payments, and profit-sharing with workers in total labor costs.

Table 5 presents results for the relative-wage regressions. Relative wages are defined as the log ratio of white collar to blue-collar average annual average annual wages. To address the possibility of multicollinearity, we begin by regressing in the first column relative wages on the two trade policy variables without any other controls. We then redo the analysis in first differences in the second column. Unfortunately, due to very little time series variation in many of the other independent variable, we only redo (1) in first differences. In the third column, we add other measures of openness. In the fourth column we add technology and labor market institution variables. Finally, in the fifth column we add additional measures of technological change. so

TRADE REFORM: Wage Inequality and Globalization 4

February 19, 2015

Nevertheless, there are a number of problems associated with estimating (4). Relative wages and value-added both determine and are determined by cost shares. In addition, we would like to know whether shares are changing because wages are responding to technology shocks, or employment levels, or both. Consequently, instead of estimating (4) we estimate a reduced form for both relative wages and relative employment levels separately as a function of both technology shocks and capital stock, the two variables in (4) which are pre-determined. This allows to identify the separate effects of technology shocks on both relative wages and relative employment. More info

Estimation Issues and Results

We have annual data on 2,354 manufacturing plants from the Secretariat of Trade and Industrial promotion (SECOFI) for 1984 through 1990. We proceed to examine the observable characteristics of these plants which are correlated with the relative wages and relative employment of skilled workers. We do so by regressing the log ratio of white-collar to blue-collar wages and the log ratio of white-collar to blue-collar employment on measures of (i) plant and industry export activity, (ii) plant and industry foreign-ownership status, (iii) trade protection, (iv) plant technology characteristics, and (v) characteristics of labor-market institutions observed at the plant level.

TRADE REFORM: Wage Inequality and Globalization 3

February 18, 2015

To address these possibilities, we turn to plant-level evidence on the factors that contribute to relative wage and relative employment changes. In departing from a general equilibrium framework, we no longer test for the importance of H-O effects on wage inequality.
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In fact, if both skilled and unskilled labor are perfectly mobile across sectors, sector-specific changes in tariffs and quotas should have an insignificant impact on sector or plant-level wage inequality. However, the estimation presented below could be consistent with a specific factors model, where labor is the specific factor. For example, if skilled labor is specific to the export sector, while unskilled labor is specific to the importable sector, trade reform could be associated with increasing wage inequality in Mexico.

These results are consistent with Revenga (1997), who argues that unionization gave workers sector-specific rents. The evidence presented in Revenga (1997) suggests that Mexican workers in manufacturing adjusted primarily through sector-specific wage declines, rather than through employment reallocation. In Morocco, where unions have no power, there was no evidence of sector-specific wage responses to the trade reform.

TRADE REFORM: Wage Inequality and Globalization 2

February 17, 2015

Although the results presented in Section II address the overall impact of trade on trade and labor, they do not analyze the distributional consequences of trade reform for skilled and unskilled labor. This is an issue which has been extensively studied for the United States and other developed countries, but much less so for developing countries. In this section, we focus on Mexico’s experience with trade reform. Mexico is a particularly interesting case because wage inequality had been declining in the decades prior to reform in 1985. Following the trade reform, however, the ratio of skilled to unskilled wages increased dramatically.
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In a world with mobile labor, the impact of trade reform on wage inequality should be analyzed in a general equilibrium context. Under the standard general equilibrium framework of the Heckscher-Ohlin model, trade reform could be associated with increasing inequality if opening up to trade increases the price of skill-intensive goods (the Stolper-Samuelson Theorem). In the Mexican context, this would imply one of two possible hypotheses: (1) Mexico has a comparative advantage in producing goods which are intensive in the use of skilled labor or (2) Mexico protected its labor intensive sectors prior to the trade reform.