Essays on International Trade and Inequality

Title of Document: ESSAYS ON INTERNATIONAL TRADE AND INEQUALITY Lourenço Senne Paz, Doctor of Philosophy, 2009 Directed By: Professor Nuno Limão Department of Economics In this dissertation I assess the impact of developing country trade liberalization on their wage inequality by focusing on two possible channels, namely job formality and inter-industry wage premium. Informal workers are a large share of the workforce, more than 30% in Brazil and Colombia, and this share within manufacturing has increased in some countries that underwent trade liberalization. In chapter one I develop a theoretical model that endogenously generates informal jobs due to a payroll tax, and in which domestic and foreign import tariffs affect the industry-level share of informal workers and the formal-informal wage gap. My model predicts that a decrease in import tariffs increases both the informality share and the formal-informal wage gap, whereas a decrease in foreign tariffs has the opposite effect. In chapter two I verify if these predictions are supported by data from the Brazilian trade liberalization episode (1989-2001), which contain information about workers’ employment, demographic characteristics, and payroll tax compliance. To avoid endogeneity concerns I employ an instrumental variables technique. I find that a percentage point decrease in import tariffs leads to a 0.8 percentage point increase in the informality share and a 0.4 percentage point increase in the wage gap. A percentage point reduction in foreign tariffs implies a decrease of 0.35 percentage point in the informal share and a 0.17 percentage point decrease in the wage gap. In chapter three I investigate the inter-industry wage premium channel by focusing on two aspects ignored by the existing literature. The first is whether trade policy affects wage premium for tradable and non-tradable industries differently. The second aspect is if productivity determines both the wage premium and import tariffs, then its omission will generate inconsistent estimates of the effect of import tariffs. Using late 1980s data from the Colombian trade liberalization episode, I find that only the tradable and manufacturing industries wage premia are sensitive to changes in import tariffs. Furthermore, productivity is an important determinant of the wage premium and the import tariff (as an included instrument). Its omission generates a 100% larger estimated impact of trade liberalization impact on the wage premium. ESSAYS ON INTERNATIONAL TRADE AND INEQUALITY.