Trade Protection and Wages: Evidence from the Colombian Trade Reforms
National Bureau of Economic Research, 2001 - Economics - 36 pages
Starting in 1985, Colombia experienced gradual trade liberalization that culminated in the drastic tariff reductions of 1990-91. This paper exploits these trade reforms to investigate the relationship between protection and wages. The focus of the analysis is on relative wages, defined as industry wage premiums relative to the economy-wide average wage. Using the June waves of the Colombian National Household Survey, we first compute wage premiums for the period 1984-98, adjusting for a series of worker characteristics, job and firm attributes, and informality. We find that industry wage premiums in Colombia exhibit remarkably less persistence over time than U.S. wage premiums. Similarly, measures of trade protection are less correlated over time than in the U.S. data, indicating that as a result of trade liberalization the structure of protection has changed. Regressions of wage premiums on tariffs, without industry fixed effects, produce a negative relationship between protection and wages; workers in protected sectors earn less than workers with similar observable characteristics in unprotected sectors. With fixed effects the results are reversed: Trade protection is found to increase relative wages. The effect is economically significant: Elimination of tariffs in an industry with an average level of protection in 1984 would lead to a 4% wage decline in this industry. For the most protected industries the effect increases to 7.3%. We also find that - in contrast to the U.S. - sectors with high import penetration in Colombia pay higher wages; nevertheless, regressions with industry fixed effects indicate that an increase of imports in a particular sector is associated with lower wages. The differences between the results with and without fixed effects are indicative of the importance of (time-invariant) political economy factors as determinants of protection. Further issues concerning the effects of trade liberalization, such as the relevance of time-variant political economy factors, the i
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based on specification clustered by industry column applies dependent variable different wage premiums EC*Exchange Rate 0002 effects of trade employment errors are robust exchange rates factors of production four sections indicate given column import penetration imports and exports indicate separate regressions Indicators no yes industry characteristics industry fixed effects industry wage differentials industry wage premiums informal sector IP*Exchange Labor Economics labor market Lagged Export/Consumption Lagged Imp Lagged Imports*Ex.Rate liberalization in Colombia NBER Nominal tariff 0005 Nominal tariff 0009 number of observations omitted variable bias Pavcnik percent political economy factors productivity regressions using different relative wages Reported standard errors Robertson 1999 robust and clustered sections indicate separate skill premium Table 4a tariff coefficient trade flows trade liberalization trade policy trade protection trade reform unobserved variation wage premiums based worker characteristics workplace characteristics WP2 Nominal WP3 Nominal tariff year-to-year correlations yes Industry Indicators yes no yes yes yes Note