Trade liberalization and wage inequality

This paper studies empirically the link between trade liberalization and wa ge inequality in Chile. Within the context of the Heckscher-Ohlin-Samuelson (HOS) model, we use cointegration techniques to estimate the long run rela tionship between the skill premium in Chile and product prices, openness an d factor endowments. We find that the fall in the relative price of labor-i ntensive goods helps explaining the increase in wage inequality in Chile du ring the last two decades, The increase in proportion of the labor force wi th college degree, on the other hand, tends to reduce wage inequality in Ch ile. Openness, measured as the volume of trade over GDP, widens the wage ga p between skilled and unskilled labor. We offer some hypothesis on the elem ents that are behind this positive relationship between wage openness and i nequality, but no empirical work is done. This area may be an interesting s ubject of research. (C) 1999 Elsevier Science B.V. All rights reserved.