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Does Tariff Liberalization Increase Wage Inequality? Some Empirical Evidence

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Does Tariff Liberalization Increase Wage Inequality? Some Empirical Evidence This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: Globalization and Poverty Volume Author/Editor: Ann Harrison, editor Volume Publisher: University of Chicago Press Volume ISBN: 0-226-31794-3 Volume URL: http://www.nber.org/books/harr06-1 Conference Date: September 10-12, 2004 Publication Date: March 2007 Title: Does Tariff Liberalization Increase Wage Inequality? Some Empirical Evidence Author: Branko Milanovic, Lyn Squire URL: http://www.nber.org/chapters/c0118 143 4.1 Introduction The evidence reported and reviewed elsewhere in this volume suggests that increasing openness to trade is associated with higher growth and that growth can in turn explain much of the observed reduction in poverty (see in particular Harrison’s introduction to this volume). A secondary ques- tion is whether the poor benefit as much as, more than, or less than other members of society as a result of trade liberalization. The relationship be- tween trade liberalization and the distribution of income remains a hotly debated issue even though standard theory in the shape of the two-factor, two-country Heckscher-Ohlin model provides an unambiguous predic- tion: trade liberalization will increase the relative price of the abundant fac- tor, which in the case of developing countries is usually taken to be un- skilled labor. This in turn should reduce inequality. As argued elsewhere in this volume, however, the Heckscher-Ohlin spec- ification is a drastic simplification of a complex phenomenon, and rela- tively minor steps toward greater realism or a shift in focus toward differ- ent aspects of trade liberalization complicate matters (Davis and Mishra, chap. 2 in this volume). To take just one example, Feenstra and Hanson (1997) focus on a different form of “trade”: the transfer of production from Branko Milanovic is a senior associate in the Global Policy

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