TRADE REFORM: Wage Inequality and Globalization 3

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.

Heterogeneous Responses Across Plants

To motivate our empirical results, we briefly summarize the rationale for estimating cost share equations and then discuss our departure from this approach. Previous literature sometimes specifies a cost function in which technology enters as a separate input and in which changes in technology over time have a non-neutral effect on labor inputs as classified by skill type.

We specify the following restricted variable cost function:
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where TVC is total variable costs, which we measure as total labor costs; Ws is the wage of skilled workers, which we measure as the average wage of white-collar workers; Wu is the wage of unskilled workers, which we measure as the average wage of blue-collar workers; K is the stock of quasi-fixed plant and equipment; Y is value added; and T is an index of technology, which we assume is a function of time. Subscripts for individual plants are suppressed.

We assume that we can approximate equation (1) by the following translog function:
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where , is a disturbance term. Brown and Christensen (1981) give the formal derivation of the restricted translog cost function. Bartel and Lichtenberg (1987) and Berman, Bound, and Griliches (1994) also use a translog restricted variable-cost function to identify the effects of skill-biased technical change.

To obtain an expression for variable input demands, we apply Shephard’s lemma, which states that blnTVC/bWt = S, where St = W L /E W L ,, or that derivative of the restricted cost function with respect to the price of labor type i equals the share of labor type i in total labor costs. This allows us to define the variable cost share equation for variable input i:
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