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Trade Liberalization and Wage Inequality in Chile

This paper studies empirically the link between trade liberalization and wage inequality in Chile. Within the context of the Heckscher–Ohlin–Samuelson (HOS) model, we use cointegration techniques to estimate the long run relationship between the skill premium in Chile and product prices, openness and factor endowments. We find that the fall in the relative price of labor-intensive goods helps explaining the increase in wage inequality in Chile during the last two decades. The increase in proportion of the labor force with college degree, on the other hand, tends to reduce wage inequality in Chile. Openness, measured as the volume of trade over GDP, widens the wage gap between skilled and unskilled labor. We offer some hypothesis on the elements that are behind this positive relationship between wage openness and inequality, but no empirical work is done. This area may be an interesting subject of research.