Trends in Tariff Reforms and Trends in Wage Inequality

Abstract

The authors provide new evidence on the impacts of trade reforms on wages and wage inequality in developing countries. While most of the current literature on the topic achieves identification by comparing outcomes before and after one episode of trade liberalization across industries, they propose a stronger identifying strategy. The authors explore the recent historical record of policy changes adopted by Argentina: from significant protection in the early 1970s, to the first episode of liberalization during the late 1970s, back to a slowdown of reforms during the 1980s, to the second episode of liberalization in the 1990s. These swings in trade policy comprise broken trends in trade reforms that they can compare with observed trends in wages and wage inequality. After setting up unusual historical data sets of trends in tariffs, trends in wages, and trends in wage inequality, the evidence supports two well-known hypotheses: trade liberalization, other things being equal, (1) has reduced wages, and (2) has increased wage inequality.