The implications of trade liberalization for income distribution are one of the most important aspects of the current economic debate in Latin America. On the one hand, the countries in the region have increasingly opened their markets to world imports during the 1990s. This at a time when negotiations for a Free Trade Agreement of the Americas (FTAA), including the USA, Canada and all Latin American and Caribbean countries (with the exception of Cuba), are gaining momentum. On the other hand, as a recent study argues income inequality remains "one of the greatest socioeconomic ills" the Latin American region faces today (IDB 1999). Most surprisingly, however, in the negotiations of the FTAA little concern has been placed on income inequality. This can perhaps be blamed on the theory. Certainly, the theory predicts that trade liberalization is more likely to increase income inequality in developed countries than in developing countries. It is argued that since the latter are relatively more abundant in less-skilled labor and they are assumed to use trade barriers to protect home-based production of skill-intensive goods, the removal of these barriers would make the relative prices of these goods decrease. In response to this, less-skill-intensive industries would expand with the result that the demand for less-skilled workers would increase. As a consequence, the wages of the latter would increase relative to the wages of more skilled workers. This ultimately would lead to the reduction of income inequality, since labor income is the major source of household income. In this paper, we analyze these issues in the cases of Mexico and Chile.
Most of the studies on the links between trade liberalization and changes in relative wages rely on the Heckscher-Ohlin (H-O) model and the Stolper-Samuelson (S-S) theorem. The present article is not an exception. However, trade is not the only source of shifts in relative wages. As it is argued in the literature, skill-biased technological change is likely to increase the wage gap in both developed and developing countries. Accordingly, theories that focus on the effects of technological change on labor demand will also be considered and their relative importance for the explanation of the relevant issue will be evaluated. Other factors that may influence the wage gap such as changes in the functioning of the labor market are excluded from the analysis. Some references to these alternative sources of wage differentials will be made in the text however.
In accordance with what has been said, this paper focuses on the following questions. In the cases of Mexico and Chile is there a positive, negative or no relationship between trade and wage inequality? To what extent has technological change been associated with the rise in wage inequality between skilled and unskilled workers in the mentioned countries? Is trade, technological change, or both to blame for the recorded increases in wage inequality? In order to answer these questions we ran regression analyses on data from both National and International sources. Depending on data availability, the analysis was limited to the 1984-1999 period in the case of Mexico and to the 1980-1995 period in the case of Chile.
The structure of the paper is as follows. The theoretical approach, relating trade liberalization and wage inequality with the focus placed on the Heckscher-Ohlin-Samuelson model, is discussed in section II. The relationship between wage differentials and technological change is also explored in this section. section III gives an overview over the liberalization process in Chile and Mexico while reviewing the results from previous studies on the factors influencing wage differentials in these countries. The econometric model is presented in section FV, which also gives a brief description of the variables and data sources. section V summarizes the results of the analysis, and interprets them in light of the theoretical approaches stated in previous sections. …